University  of  California. 

FROM    THK    LIBRARY    <  >F 

DR.    FRANCIS     LlE'BER, 
Professor  of  Histdfy  and  Law  in  Columbia  College,  New     ork. 


THK   (II KT   OK 

MICHAEL     REESE, 

1  H  T  3  . 


C/-  ^  • 

"r    " 


THE 


WAYS    AND    MEANS 


OF 


PAYMENT 


PULL  ANALYSIS 


OP 


THE    CREDIT    SYSTEM, 


"WITH     I'fS 


VARIOUS   MODES   OF   ADJUSTMENT. 


BY 

STEPHEN    COLWELL. 


PHILADELPHIA: 

J.   B.   LIPPINCOTT    &    CO. 

1859. 


• 


Entered,  according  to  the  Act  of  Congress,  in  the  year  1859,  by 

J.  B.  LIPPINCOTT    &    CO., 

in  the  Clerk's  Office  of  the  District  Court  of  the  United  States  for  the  Eastern  District 

of  Pennsylvania. 


CONTENTS. 


PAQK 

INTRODUCTION 1 

CHAPTER    I. 

Exchange  of  commodities  an  incident  of  civilized  life  —  Agencies  of 
this  exchange  not  to  be  confounded  with  the  exchange  itself —  The 
fitness  of  these  agencies  best  determined  by  treating  them  as  agencies 
more  or  less  necessary  to  the  main  purpose,  but  not  indispensable  — 
Money,  and  money  of  account 25 

CHAPTER    II. 

MONEY     OF     ACCOUNT. 

§  1.  The  employment  of  gold  and  silver  involves  terms  in  -which  to 
express  their  value  —  Mint  price  and  market  price  —  Money  of 
account  a  necessity 31 

|  2.  Idea  of  value  carried  in  the  mind  as  the  idea  of  weights,  measures 
of  length  and  capacity  —  The  use  of  money  of  account  is  much 
greater  than  of  money — Often  confused  in  language  —  Kelly's  Cam 
bist  —  Varieties  of  moneys  of  account  —  Decimal  system 35 

I  3.  British  money  of  account  —  The  pound  sterling  —  Guinea  —  Sir 
Isaac  Newton  —  Lord  Liverpool  and  the  system  of  1816 — Why  frac 
tions  in  weight  of  coins — Coins  adjusted  to  money  of  account — "What 
is  a  pound  ?"  —  Fixed  price  of  precious  metals  —  Influx  of  gold  — 
Depreciation  only  postponed  —  Remedy — Suspension  of  payments 
in  Great  Britain  in  1797 46 

I  4.  Colonial  currency  of  Canada,  and  of  the  thirteen  colonies  now 
part  of  the  United  States 55 

g  5.  Moneys  of  account  in  Italy,  Germany,  &c.  —  Evils  of  varied  coin 
age  —  Coinage  implies  a  previous  price  —  Coins  not  a  measure  — 
Prices  in  money  of  account  understood  instantaneously  —  Ricardo  — 
Sir  James  Stewart  —  Bishop  Berkeley  —  Montesquieu  —  Money  of 

account,  its  limits  of  usefulness  —  Edinburgh  Review 59 

(iii) 


iv  CONTENTS. 

Notes  to  Chapter  II. 

I.  Marquis  Gamier  and  his  critic,  Letronne 75 

II.  Extract  from  a  paper  by  the  author,  in  the  Bankers'  Magazine  — 
Prices  —  British  money  of  account  —  Locke  and  Lowndes,  and  the 
recoinage  controversy  of  1G95  —  Continental  currency — Introduction 

of  dollar  unit  —  Robert  Morris  —  Alexander  Hamilton 77 

III.  Extract  from  a  paper  by  the  author,  in  Hunt's  Merchants'  Maga 
zine  —  Nature  and  functions  of  money  of  account  —  Disturbance  of 
prices  of  precious  metals  —  Legal  tender  —  Depreciation  of  paper 
currency  —  Coinage  system  of  Great  Britain 90 

CHAPTER    III. 

GOLD     AND     SILVER     AS     MONEY. 

$  1.  Gold  and  silver  a  common  equivalent  or  medium  in  the  inter 
change  of  commodities  —  Circulation  by  weight  —  Not  constituted 
money  by  coinage,  which  only  facilitates  circulation  —  Diversity  of 
mints,  and  confusion  of  coins  — Wear  and  waste  —  Clipping,  filing, 
sweating  and  counterfeiting 101 

$2.  Circulation  of  the  precious  metals  as  money  —  Commerce  de 
pends  on  coins  for  so  much  use  as  is  made  of  them,  and  no  more  — 
They  perform  no  functions  beyond  the  use  we  see  made  of  them ....  110 

§  3.     Quantity  of  money  required  for  the  business  of  a  country 118 


CHAPTER    IV. 

GOLD     AND    SILVER    STANDARD    OF    PAY  ME XT. 

1.  The  precious  metals  neither  a  measure  nor  a  standard  of  value  — 
The  legal  standard  of  payment —  Standard  of  coinage  —  Legal  tender 
—  Objections  to  legal  price  of  gold  and  silver  —  Earl  of  Liverpool  — 
Price  of  gold  fixed  by  authority  in  Great  Britain  —  Seignorage  on 
coins  for  retail  business  — Waste  and  folly  of  incessant  recoinage  — 
Legal  tender  at  market  price  safe  in  large  transactions. 123 

2.  Coinage  —  French    coinage  —  Debasement,    frauds,    disturbed 
money  of  account  —  System  of  the  United  States  —  Act  of  Congress, 
1792,  adopting  the  dollar  unit  —  Price  of  gold  fixed  —  Results  —  Act 
of  June,  1834,  reducing  weight  of  gold  coins  —  Result  —  Act  of 
February,  1853  —  Silver  coinage  —  Ingots  of  gold  —  Export  of  silver.  137 


CONTENTS.  V 

Notes  to  Chapter  IV. 

I.  Earl  of  Liverpool  —  British  system  of  coinage  adopted  in  1816 ....  146 

II.  System  of  coinage  in  the  United  States  —  Double  standard  —  Pro 
posed  adoption  of  single  standard  of  gold,  as  a  remedy  for  scarcity  of 
silver  —  Reduction  in  the  value  of  our  silver  coins 149 

CHAPTER    V. 

COINS    NOT    A    MODEL    CURRENCY. 

The  actual  use  of  coins  measures  their  importance  and  power  — 
Modes  of  payment  more  efficient  —  Each  to  be  judged  upon  its  merits 
—  Usages  of  trade  assign  to  coins  their  office  —  Not  a  model  cur 
rency —  Bear  no  higher  interest  than  a  credit  in  bank  —  The  British 
act  of  1844,  requiring  the  issues  of  banks  to  fluctuate  as  gold  — 
Sir  Robert  Peel  —  Lord  Overstone  —  Col.  Torrens  —  Question  one  of 
commerce  and  payment  —  Return  to  hard  currency  impossible 155 

CHAPTER    VI. 

BANKS      OF      DEPOSIT. 

|  1.     Bank  of  Amsterdam 174 

I  2.     Bank  of  Hamburg 181 

Note  to  Chapter  VI. 
Bank  of  Amsterdam 184 

CHAPTER    VII. 

THE      CREDIT      SYSTEM. 

|  1.  Distinction  between  credit  and  the  credit  system  —  The  latter 
defined  —  Business  of  payments  separated  from  the  business  of  dis 
tributing  commodities  —  Trade  made  virtually  a  barter  —  Division 
of  labor  leads  to  this  —  Relations  of  debtor  and  creditor  mutual,  and 
mainly  among  the  same  classes  — The  fund  which  pays  debts  derived 
from  credits  the  counterpart  of  debts  —  Credits  as  a  currency  — 
Convertibility  —  Blending  credits  and  money  —  Diversion  of  credits 
from  their  proper  functions 188 

3  2.    Books  of  account 200 

CHAPTER    VIII. 

1  COMMERCIAL     SECURITIES. 

\  1.  Promissory  notes  and  bills  of  exchange,  their  efficiency  as  means 
of  payment  —  As  evidences  of  debt,  they  aid  in  separating  the  busi 
ness  of  trade  from  that  of  payments — Dealers  in  exchange — Bankers 
— Concentration  of  debts  and  credits — Balances — Use  of  notes  and 
bills  in  Lancashire,  England,  and  in  the  United  States  —  Limits  of 
use  in  payments  —  Mutual  debts  and  set-off 205 


VI  CONTENTS. 

I  2.  Foreign  exchange  a  means  of  payment  —  Complicated  with  coin 
age  and  its  evils,  and -with  increased  transactions  of  domestic  trade — 
Processes  of  foreign  payments  readily  perceived  —  Imports  —  Ex 
ports  —  Dealers  in  exchange  and  bankers  —  Payments,  where  to  be 
made  —  Hate  of  exchange  —  Circuitous  exchange  —  Fluctuations  in  • 
exchange  —  Economy  of  payment  increases  trade 212 

$  3.  Fallacy  of  making  foreign  exchange  a  criterion  of  domestic  cur 
rency — Foreign  exchange  simply  the  process  of  paying  and  receiving 
debts  of  foreign  trade  —  The  medium  employed  has  its  proper 
agency  —  So  \vith  payments  of  domestic  trade  —  Neither  should 
guide  nor  control  the  other  —  Payments  as  distinct  as  the  trade  to 
which  they  belong — Long-continued  adverse  foreign  exchange  of 
American  colonies,  and  its  results 221 

Note  to  Chapter   VIII. 

Foreign  exchange,  its  relations  with  banks  —  Export  of  specie  —  Con- 
•    traction  of  our  currency  —  Resident  agents  of  foreign  merchants  and 
manufacturers,  their  influence  on  foreign  exchange  and  domestic 
currency 228 

CHAPTER    IX. 

BANK-NOTES. 

Facility  and  power  of  bank-notes — Disadvantages — Issued  in  exchange 
for  paper  of  individuals  —  Convertibility  not  the  basis  of  bank-notes, 
but  a  security  against  abuses  —  Inadequacy  —  Banks,  and  the  re 
straints  imposed  upon  them  —  Bank-notes  a  medium  by  which  com 
modities  pay  for  commodities — Demand  for  bank-notes  by  the  debtors 
of  banks,  the  cause  and  result  —  Bank-notes  and  progress  of  con 
sumption  —  Circulation  and  efficiency  —  Exchange  between  banks  — 
Proportion  of  bank-notes  decreasing 231 

CHAPTER    X. 

DEPOSITS     IN     BANKS. 

A  greater  facility  than  bank-notes  needful  —  Banks  the  reservoir  of 
funds  not  in  actual  use  —  The  fund  employed  in  large  payments  — 
Credits  the  fund  which  pays  debts  —  Depositors  employ  their  credits 
to  pay  their  debts  —  The  credits  will  pay  the  debts  —  Deposits  vir 
tually  a  system  of  accounts  kept  by  the  banks  for  their  customers  — 
Indebtedness  chiefly  mutual,  and  settled  by  set-off — Demand  for 
deposits  —  Circulation  —  Absorbed  by  the  banks  in  payments  of  dis 
counted  paper  —  The  banks  pay  fur  paper  with  credits,  and  receive 
them  in  payment 241 


COX  TENTS.  VU 

CHAPTER    XI. 

CLEARING-HOUSES. 

$  1.  The  Clearing-house  of  London  —  Private  bankers — Concentra 
tion  of  payments  —  Mutual  adjustment  —  Mutuality  of  debts — Pro 
cesses  at  the  Clearing-house  —  Amounts  cleared  —  Bullion  Report 
of  1810 — Sir  Henry  Thornton  —  Relations  of  clearing  to  commerce 

—  Banks  and  their  customers  —  Payments   of  foreign   trade — Do 
mestic   payments  of  special  districts  —  The  credit   system  —  New- 
channels  for  the  precious  metals 252 

$2.  Bank  adjustment  in  the  United  States  —  Clearing  between  the 
banks  —  Mutual  accounts  and  correspondence  —  Domestic  exchange 

—  Balances  of  home  trade  —  Mutual  debts  the  basis  of  this  adjust 
ment —  The  system  of  clearing  in  New  England,  at  the  Suffolk  Bank 

of  Boston 265 

$  3.  Clearing  between  the  banks  of  Scotland  —  Balances  payable  in 
Exchequer  bills,  notes  of  the  Bank  of  England,  or  gold  —  Their  sys 
tem  of  deposit,  and  its  influence  upon  business  —  Stimulus  to  punc 
tuality  and  industry  —  Circulation  of  bank-notes  in  Scotland  —  One 
pound  notes  . .  * 271 

CHAPTER    XII. 

FAIRS. 

Commercial  Fairs  of  the  13th,  14th  and  15th  centuries  —  Continued  on 
the  confines  of  Asia  and  Europe — Kiachta — Nijni  Novgorod — Kief — 
Concentration  of  payments  —  Fairs  of  Lyons  —  Payments  of  Lyons 

—  The  opening  —  Mode  of  conducting  — Viramen  de  partie  —  Set- 
ting-off  debts  —  Payment  of  balances  —  Results  —  Rationale  —  Illus 
trations  —  Fairs  of  Novi  and  others  in  Italy  chiefly  for  payments.  . .   275 

CHAPTER    XIII. 

THE      BANK      OF      VENICE. 

Bank  of  Venice  —  Originated  1171,  in  a  loan  to  the  Republic  —  Office 
of  transfer  —  Interest  paid  —  Transfers  in  payment  of  commodities 
and  debts  —  Sums  deposited  taken  by  the  Republic  —  In  1423,  bills 
of  exchange  and  payments  in  gross  made  only  in  bank  —  Premium 
on  bank  funds  —  Circulation  —  Banco  del  Giro  —  Evils  of  coinage, 
and  severity  of  laws  —  Department  for  deposits  repayable  on  de 
mand  and  transferable — Its  success — Deposits  taken  by  the  Govern 
ment,  but  repaid  —  Capital  of  the  Bank  —  London  Encyclopaedia 
corrected  —  Causes  of  agio  —  Precautions  against  fraud  —  Concen 
tration  of  payments  at  Venice 288 


Viii  CONTENTS. 

CHAPTER    XIV. 

THE      BANK      OF      GENOA. 

House  of  St.  George,  or  Bank  of  Genoa  —  Contrast  in  financial  systems 
of  Venice  and  Genoa  —  Complications  of  Genoese  finance — Security 
exacted  by  public  creditors  —  The  system  of  1302,  its  officers  —  Pri 
vate  bankers —  Bank  in  1407  —  Large  array  of  officers — Deferred 
dividends,  or  Moneta  di  Paghe  —  Famine  of  1539  —  Deposit  system 
—  Bank  bills  —  Price  of  shares  —  Money  and  moneys  of  account  — 
Advantages  of  Bank  to  trade  —  Processes  of  the  Bank  —  M.  Gautier 
and  M.  Coquelin  on  the  moneys  of  account  of  the  Bank  —  Carlo 
Cuneo  on  the  moneys  of  Genoa 311 

Note  to  Chapter  XIV. 
Italian  \vriters  —  Dictionnaire  du  Commerce,  Paris,  1839,  corrected. . .   337 


CHAPTER    XV. 

THE     BANK     OF     ENGLAND. 

1.  Opinions  and  projects  on  credit  and  currency  previous  to   the 
Bank  of  England  —  Samuel  Lambe's  plan,  1665  —  Evils  of  the  coin 
age — Dr.  Hugh  Chamberlain's  plan,  1665 — Large  model  of  a  Bank, 
1678  —  Bank  of  Credit,  1682  —  Bank  of  Credit,  1683  —  R.  Murray's 
plan,  1695  —  J.  Asgill's  plan,  1696  —  Office  of  credit,  1698 339 

2.  Bank  of  England  chartered  in  1694 — William  Patterson  the  pro 
jector —  Founded  on  a  loan  of  £1,200,000  at  eight  per  cent. —  Oppo 
sition  and  objections  —  Commenced  1695  —  Bank-notes  —  Advances 
to  government  —  Recoinage  —  Rate  of  discount  —  Business  of  the 
Bank  —  Deposits  —  Bank   bills  —  Credit — Goldsmiths   robbed   by 
Charles   II.  —  Safety   of  deposits  —  Use   of  deposits  —  Bank   bills 
payable  on  demand  —  Bills  of  exchange  and  promissory  notes  on 
time  —  Convertibility — Bank-notes  not  substitutes  for  specie,  but 
for  commercial  paper:  should  fluctuate  with  this  paper,  and  not  with 
coin  —  Concentration  of  payments  in  London 352 

3.  Bank  of  England's  credits  in  account  —  Deposit  of  bank-notes  — 
Conversion   of    individual   paper   into   bank-notes  —  Bank    issues 
credits,  and  receives  credits  in  payment  —  Credits  wrongly  blended 
with  deposits  —  Open  credits  payable  on  demand  hazardous  —  Ob 
jections —  Credits  payable   on   demand  abolishes  time  on  bills  of 
exchange  and  promissory  notes — Mingling  credit  and  money  — 
Consequences  —  Real  nature  of  credits  in  account  —  Expand  with 
trade,  diminish  with  it  —  Not  money  —  Payment  by  bank  credits 
not  dependent  on  money  —  Not  a  question  of  convertibility 379 


CONTENTS.  IX 

|  4.  Bank  of  England  suspension  from  1797  to  1822  —  Order  of  Privy 
Council  —  Opposition  —  Terms  of  suspension  —  Extensions  —  Pro 
gress  of  the  country  during  suspension  —  Dissatisfaction  —  Lord 
King  —  Convertibility —  Processes  of  payment  the  same  during  sus 
pension  as  before  —  Bank  issues  and  the  commodities  of  trade — The 
credit  system  —  Controversy  as  to  depreciation  during  suspension  — 
Bullion  Report,  1810  — Bullionists  and  anti-Bullionists  —  Tooke's 
History  of  Prices  —  Prices  of  gold  and  silver,  and  amount  of  circula 
tion,  from  1797  to  1821 394 

CHAPTER    XVI. 

THE      BANKS      OF      SCOTLAND. 

The  Bank  of  Scotland  chartered,  1695— John  Holland's  account  — 
Contrast  with  Bank  of  England  —  Founders  of  the  Scottish  Bank 
avoid  relations  with  Government  —  Object,  economy  of  money  — 
Bank-notes  —  Trouble  with  Royal  Bank  —  Suspension  —  Modes  of 
relief — Identified  with  masses,  by  receiving  small  deposits  on  in 
terest —  Forty  banks,  340  branches  —  Harmony  —  English  preju 
dices,  Scotch  scorn  —  Cash  credits  a  principal  feature  —  Contrasts 
with  English  system  —  Scotch  system  equally  effective,  and  safer  — 
Bank  failures  few,  and  not  disastrous  —  Suspension  of  1797  in  Eng 
land  without  effect  in  Scotland  —  Reports  to  the  House  of  Lords  and 
to  the  Commons,  1826  —  System  not  cordially  approved  in  England 

—  One-pound  notes  —  Discussions  —  Sir  Walter  Scott's  level  of  gold 

—  Modes  of  regarding  the  subject  in  England  and  Scotland — Scotch 
Banks  the  pride  of  the  people  — \V.  Chambers'  distrust,  with  expla 
nations  407 

Note  to  Chapter  XVI. 
Regulations  for  exchange  of  Scotch  Bankers'  notes 442 

CHAPTER    XVII. 

BANKS     OF      THE      UNITED      STATES. 

§  1.  Banks  are  agencies  of  payment — Discussions  and  different  views 
— Banks  are  dealers  in  credits  —  General  waiver  of  legal  currency — 
Paying  fund  from  the  proceeds  of  discounted  notes  —  Banks  absorb 
their  own  issues  —  Process  exemplified  —  Demand  for  bank  currency 
makes  it  good  —  Commodities  of  trade  held  by  debtors  to  banks  — 
Sold  to  pay  the  banks  —  Bank  currency  the  medium  —  Commodities 
the  basis  ;  individual  and  bank  paper  mere  securities  and  means  of 
adjustment — Circulation  and  deposits  of  New  York  banks  in  1857 — 
Daily  payments  —  Banks  of  the  United  States  pay  and  are  paid 
in  their  own  currency,  and  thus  furnish  a  safe  medium  for  circula 
tion  —  Mutual  debts ...  444 


X  CONTENTS. 

\  2.  Bank-notes  not  money,  but  promissory  notes  of  banks — Perform 
the  functions  of  money  —  Deposits  are  so  employed,  but  are  not 
money — Both  substituted  by  banks  for  notes  of  individuals  —  Banks 
make  securities  of  paper,  not  money  —  Convertibility  of  bank-notes 
does  not  make  them  money ;  it  is  a  mere  check  on  the  banks  —  Gold 
and  silver  not  the  basis  of  bank  issues  ;  these  are  based  on  paper  dis 
counted  by  the  banks,  and  this  paper  is  based  on  the  commodities 
for  which  it  is  given  —  Convertibility  an  inadequate  check  —  Em 
ployed  with  fatal  effect  against  those  who  rely  upon  it  —  It  abolishes 
time  on  commercial  paper 459 

§  3.  Bank  issues  and  agency  the  chief  actual  medium  of  payment  — 
New  York  banks  in  1857  —  Contraction  of  currency  —  Fund  used  to 
pay  debts  — Process  of  paying  continuous  — City  banks  and  country 
banks  —  The  former  chief  agents  in  payments  —  Demand  for  specie 
—  Panics  —  Results  —  Banks  increase,  despite  abuses  of  banking — 
Effects  of  rapid  contractions  of  currency — What  is  called  specie  pay 
ments  —  Banks  at  the  mercy  of  the  mob  —  Men  of  business  at  the 
mercy  of  banks -  475 

g  4.  Public  right  to  the  facilities  afforded  by  banks  —  Contractions  of 
the  currency,  and  results  — Remedies  — Discounts,  proceeds  payable 
at  a  future  day  in  money,  but  receivable  at  all  times  for  debts  to 
banks  —  Deposits  payable  at  a  future  day,  but  receivable  in  bank 
for  debts  —  Bank-notes  payable  at  a  day  future,  but  receivable 
for  debts  —  Long  credits  an  element  of  disturbance  in  the  credit 
system  —  Diversion  of  funds  of  the  credit  system  from  their  proper 
channels  —  Country  banks  —  Their  business  of  a  different  nature  — 
Present  banking  system  not  adapted  to  it 489 


CHAPTER    XVIII. 

INTEREST. 

Distinction  between  prices  of  precious  metals  and  interest,  or  the  price 
payable  for  the  use  of  them  —  The  price  of  each  fixed  by  the  State — 
Evasion  —  Fluctuations  in  price  of  gold  and  silver  not  coincident 
vrith  rates  of  interest  —  High  interest  makes  no  demand  for  coins  — 
Demand  for  facilities  of  credit  system  determines  the  rate  of  interest 
—  High  interest  does  not  arise  from  scarcity  of  that  for  which  in 
terest  is  paid,  but  from  fears  of  banks  and  capitalists  —  Usury  laws 
should  not  apply  to  paper  of  the  credit  system — Amount  paid  yearly 
in  the  United  States  for  interest  —  Objections  —  Interest  a  part  of 
the  expense  of  commercial  adjustment  —  Not  a  question  of  money, 
but  of  dispensing  with  money  —  Economy  of  interest  practicable  in 
England  and  the  United  States 509 


CONTENTS.  XI 

CHAPTER    XIX. 

PRICES. 

1.  Complexity  of  the  subject — Market  value  expressed  in  money 
of  account  —  Money  is  for  payment  —  Prices,  sales  and  payments 
distinct  things — Elements  of  prices  —  Influence   of  interests  and 
passions  —  Necessity  of  purchasing  —  Necessity  of  selling — Fashion 
and  fancy  —  Plenty  and  scarcity  —  Demand  and  supply  —  Monopo 
lies  —  Commercial  legislation  —  Duties  —  Speculation — Cost  of  pro 
duction  —  Prices  in  great  marts  of  trade 521 

2.  Effect  upon  prices  of  quantity  of  money — Theory  of  Montesquieu 
acceded  to 'by  Hume,  Locke,   and  Harris;   denied  by  Sir  James 
Stewart,    Adam    Smith,    Lauderdale,    Malthus,    Ricardo,    Torrens, 
M'Culloch  —  James  Mill  —  Prices  not  expressed  in  coins,  but  in 
money  of  account — Wholesale  mainly  control  retail  prices — Lauder 
dale  —  Malthus  —  Torrens  —  M'Culloch  —  Conflict   of  opinions  — 
Marquis  Gamier  —  Adam   Smith  —  Ganihl  —  Humboldt's   propor 
tion  of  gold  to  silver — Jacob  on  precious  metals  —  Rise  of  prices  not 
in  proportion  to  the  increase  of  money — Arthur  Young's  inquiry  into 
the  progressive  value  of  money — Tables  of  prices  in  Spain — Beawes 

—  Prices  of  wheat  in  France 538 

3.  Effects  of  bank  currency  upon  prices  —  Increase  of  wealth  in 
Great  Britain  in  18th  century  —  Advance  in  prices  increases  cur 
rency —  Power  of  purchasing  depends  not  upon  money,  but  upon 
personal  confidence  —  High  confidence  leads  to  speculation  —  Lord 
Overstone  —  Tooke's  History  of  Prices  —  His  examination  before  the 
Secret  Committee  of  1832 — Evidence  on  prices  before  Parliamentary 
committees  of  1832  and  1840 — Influx  of  gold  from  California  and 
Australia  —  Comparison  of  currencies  in  United  States  in  1848  and 
1856  —  Prices  the  scale  by  which  products  of  labor  are  exchanged — 
Justice  to  labor  determined  by  what  men  can  purchase,  not  by  the 
price  they  pay 564 

CHAPTER    XX. 

PUBLIC      PAYMENTS. 

1.  Processes  of  receiving  and  paying  —  British  Exchequer,  its  prac 
tice — Exchequer  bills  introduced  by  Earl  of  Halifax  —  British  reve 
nue  always  anticipated  —  Floating  debt  a  saving  of  interest  —  Ex 
chequer  bills  suited  to  a  certain  class  of  lenders  —  Quantity  carefully 
gauged  to  the  demand — Wisely  managed  by  the  Bank  of  England — 
Advantage  of  disbursing  revenue  before  its  receipt,  thus  furnishing 
the  currency  in  which  the  revenue  is  paid  —  Amount  of  Exchequer 
bills  issued  —  Reduction  of  circulation  by  sale  of  Exchequer  bills  — 
Rate  of  interest  —  The  Exchequer  and  the  Bank  —  British  system 
in  contrast  with  that  of  the  United  States. .  577 


Xll  CONTENTS. 

\  2.  Financial  system  of  France  —  Count  Mollien  and  Marquis  D'  An- 
diffret  —  Harmony  and  subordination  of  the  system — Outline  —  Re* 
lations  with  domestic  exchange — Special  distribution  of  public 
funds  —  Money  in  treasury  shortest  time  possible  —  Economy  of 
new  system  —  Commission  on  transfers  •> —  D'Audiffret  —  Money  ad 
vanced  on  public  account  —  Firmness  of  the  system  —  France  first 
appreciates  relations  of  public  finance  with  trade  and  industry  — 
Perils  of  credit  lessened  by  this  system  —  Want  of  details  —  Contrast 
with  system  of  United  States 594 

$  3.  Treasury  of  the  United  States  —  Act  of  Congress,  1846  —  Paper 
currency  the  usage  of  the  country  —  Departure  from  usage- — Effect 
upon  banks  —  Advance  of  interest  —  Increase  of  private  banks — • 
Economy  of  the  system  —  The  remedy  a  step  towards  banking  — 
Domestic  exchange  and  the  treasury  —  Centre  of  operations  of  trea 
sury  and  domestic  exchanges  in  New  York  —  Transmission  of  funds 
to  and  from  New  York  —  Paper  operations  of  treasury  —  Present 
system  and  the  public  creditors — Indirect  taxation  and  California 
gold  favored  the  Independent  Treasury 605 

Note. — Extracts  from  Reports  of  Secretaries  of  Treasury,  Mr.  Meredith 
and  Mr.  Guthrie,  on  the  subject  of  Independent  Treasury,  and  also 
from  Report  of  Mr.  Casey,  Treasurer 613 

$  4.  Independent  Treasury  a  result  of  financial  difficulties  —  State 
banks  —  Currency  of  government  paper  and  specie  —  Opposition 
to  banks  and  paper  currency  —  Bank  of  France  —  Banks  not  to 
be  crushed,  but  replaced  —  Financial  system  of  the  act  of  1846  — 
Treasury  notes  payable  on  demand  without  interest,  and  at  six  and 
twelve  months  with  interest  —  French  loans  of  1854-5 — Whole  loan 
offered  by  people  in  France  out  of  Paris  —  Board  of  Treasurers  — 
Principles  restricting  the  issue  of  treasury  notes  —  Lenders  of 
money,  their  relations  with  the  treasury  —  Offices  in  Washington 
and  New  York  —  Connection  of  treasury  with  domestic  exchange  — 
Friction  —  A  remedy  required,  and  co-operation  of  the  treasury  —  A 
national  institution  to  form  point  of  contact  between  the  treasury 
and  the  domestic  exchange 621 

Note. — Mr.  Guthrie's  remarks  on  banking  system  of  United  States.  . . .   626 


INTRODUCTION. 


WE  propose  to  offer  here,  in  as  condensed  form  as  practicable, 
what  may  be  considered  as  the  leading  positions  of  this  volume. 
A  statement  of  this  kind  will  enable  every  reader  to  glance  more 
readily  over  those  portions  of  the  work  of  most  interest  to  himself. 
It  is  taken  for  granted,  that  whilst  there  are  so  many  conflicting 
opinions  on  the  subject  of  money,  currency,  banking  and  credit  — 
that  whilst  both  theory  and  practice  remain  in  doubt  and  dispute, 
and  no  authority  high  enough  to  settle  these  differences  has  yet 
appeared  —  there  is  room  for  the  labors  of  those  who  may  wish  to 
furnish  materials  for  the  final  adjustment  of  many  vexed  questions. 
It  is  further  assumed  that  writers  treating  of  these  subjects  have  paid 
too  little  attention  to  the  fact,  that  whatever  concerns  money,  cur 
rency,  banking  and  credit,  must  be  considered  as  strictly  subordinate 
to  commerce,  of  which  they  are  merely  agents ;  this  cannot  be  over 
looked,  in  any  aspect  in  which  these  topics  may  be  considered,  with 
out  hazard  of  error. 

The  chief  inquiry  is  not,  What  is  the  power  of  money  ?  or,  What 
is  the  use  of  money  ?  or,  What  can  be  substituted  for  money  ?  The 
inquiry  which  we  prosecute,  to  ascertain  the  nature  and  doctrine 
of  money,  is,  What  is  commerce,  and  what  is  the  nature  of  the 
agency  of  money  in  its  affairs  ?  Money,  with  all  its  substitutes,  is 
only  one  of  many  agents  of  trade,  and,  like  many  others,  it  is  a  pure 
matter  of  discretion  and  convenience  how  far  it  may  be  employed. 
Warehouses  and  ships  are  very  needful  and  much  used  agencies  of 
commerce  ;  but  a  great  business  may,  upon  occasion,  be  done  with 
out  them.  It  is  with  money,  as  with  every  other  expensive  agency  ] 
of  commerce,  a  question  not  how  much  it  can  be  used,  but  how  far  it 
can  be  dispensed  with.  It  has  always  been,  and  must  always  be,  a  . 
chief  consideration  of  the  practical  merchant,  to  ascertain  to  what 
1  (1) 


2  INTRODUCTION. 

extent  his  business  can  be  conducted  without  so  expensive  an  agent 
as  money.  By  the  progress  of  civilization,  commercial  integrity  and 
Christian  virtue,  it  is  now  possible  to  carry  on  immense  operations  in 
trade  and  manufactures  without  any  aid  from  money ;  excepting  the 
merest  retail  business,  not  one  per  cent,  of  the  payments  of  Great 
Britain  and  the  United  States  are  made  in  real  money. 

The  main  subject  of  this  volume  is  not,  therefore,  money,  but  pay- 
:  ments.  The  inquiry  before  us  has  been,  not  the  nature  and  use  of 
\  money,  but  how  are  the  payments  or  adjustments  of  commerce  effected, 
whether  by  money  or  otherwise.  The  object  has  not  been  to  bring 
forward  new  doctrines,  or  to  propose  reforms,  but  to  attempt  a  very 
ample  and  thorough  analysis  of  the  present  modes  of  employing 
money  and  credit  in  the  current  business  of  industry  and  trade.  We 
have  supposed  that  the  best  preparation  for  reforms  and  improve 
ments  would  be  a  perfect  understanding  of  the  present  system,  in 
its  various  forms.  Any  suggestion  in  these  pages  which  may  seem 
to  go  beyond  this,  is  made  with  the  greatest  diffidence,  and  more  by 
way  of  contrast  or  illustration  than  as  advice  or  doctrine. 

It  has  long  appeared  to  us  a  grave  mistake  in  those  who  have 
treated  of  money,  that  they  leave  out  of  view  money  of  account,  with 
out  a  due  understanding  of  which,  as  an  agency  of  commerce,  much 
confusion  must  reign  in  the  minds  of  all  who  approach  the  study  of 
money  or  currency.  Gold  and  silver  are  commodities  of  great  value 
in  small  compass,  selected  for  coinage,  and  made  the  legal  standard 
of  payment ;  money  of  account  is  the  language  in  which  prices  are 
expressed,  and  books  of  account  are  kept.  A  merchant  may,  in  a 
few  minutes,  cast  his  eye  over  a  hundred  entries  in  his  journal,  in 
which  the  sums  debited  for  goods  sold  may  run,  in  various  fraction 
ary  sums,  from  ten  to  a  thousand  dollars.  He  sees  at  a  glance,  and 
understands  at  what  rates  the  goods  were  sold.  But  if  the  exact 
sum  in  coins  corresponding  to  each  entry  was  placed  opposite  to  the 
entry,  instead  of  the  appropriate  figures,  it  might  require  hours  or 
days  to  ascertain,  by  counting  and  examining  the  coins,  what  is  other 
wise  understood  in  a  few  minutes.  So,  likewise,  naming  prices  in 
money  of  account  is  quickly  done,  and  instantly  understood ;  but 
making  payments  in  coins  is  necessarily  a  slow  operation.  We  dis 
tinguish,  then,  between  the  term  money,  as  applied  to  giving  prices, 
to  keeping  books  of  account,  to  expressing  sums  on  the  face  of  pro 
missory  notes,  bills  of  exchange,  and  other  securities,  and  the  term 
money,  as  applied  to  coins  used  in  making  a  payment ;  and  this  dis- 


INTRODUCTION.  3 

tincti.on  we  hold  to  be  so  important,  that  the  subject  cannot  be  well 
understood  without  it.  To  some  it  may  appear  as  if  we  had  labored 
this  point  at  needless  length,  and  with  unnecessary  minuteness  ;  but 
regarding  it  as  the  key  to  many  difficulties  of  finance,  and  consider 
ing  the  neglect  of  the  subject  hitherto,  we  have  thought  it  better  to 
be  profuse  of  illustration,  than  to  fail  of  our  object  in  securing  for 
money  of  account  its  true  position  in  the  consideration  of  the  subject. 

People  may  change  their  coins  once  a  month ;  but  they  scarce 
change  a  money  of  account  in  half  a  century.  In  many  of  the  more 
retired  portions  of  the  older  States  of  the  Union,  the  people  still 
reckon  by  the  colonial  currencies  of  pounds,  shillings  and  pence,  as 
they  existed  in  each  of  the  respective  colonies  before  the  era  of  our 
independence.  The  use  of  a  money  of  account  is  a  mental  operation, 
and  is  a  characteristic  of  every  civilized  people.  The  same  mental 
habit  is  applied  to  the  use  of  weights  and  measures,  which  makes  it 
extremely  difficult  to  change  even  what  is  obviously  absurd ;  people 
prefer  denominations  to  which  they  are  accustomed,  even  when  incon 
venient,  to  those  which  are  more  simple,  but  which  need  the  fami 
liarity  of  habit  to  make  them  appreciated. 

We  have,  therefore,  treated  money  of  account  as  a  leading  element 
of  the  subject.  It  is  the  language  of  prices,  of  books  of  account,  of 
price-currents ;  it  is  the  mode  of  expression  employed  in  all  money 
securities,  to  denote  the  amount  for  which  they  are  given ;  and,  in 
fine,  it  is  the  very  language  of  finance.  To  leave  money  of  account\ 
out,  when  the  w^hole  subject  of  currency,  banking  and  credit  is  in 
volved,  is  like  leaving  arithmetic  out  of  mathematics.  It  is  for  want  i 
of  attention  to  the  real  agency  of  money  of  account,  that  such  expres 
sions  as  the  "power  of  money"  are  often  used,  when  only  the  power 
of  credit  is  intended.  When  a  merchant  inquires  the  price  of  a  hun 
dred  bags  of  coffee,  learns  the  rate,  and  makes  the  purchase,  giving 
his  note  for  the  amount,  money  has  exercised  neither  power  nor  influ 
ence  in  the  transaction.  It  was  the  power  of  credit  which  made  the 
purchase,  and  the  power  of  money  of  account  which  enabled  the  par 
ties  to  understand  each  other,  make  the  transaction,  and  take  the 
note  for  the  amount  of  the  purchase.  The  greatest  power  in  the  com 
mercial  world  is  commercial  integrity,  and  the  confidence  or  credit 
which  it  inspires.  This  is  the  power  which  moves  nine-tenths  of  the 
commodities  found  in  the  channels  of  trade  and  industry. 

Money,  by  which  we  intend  coins  of  gold  or  silver,  is  neither  a 
standard  of  value,  a  measure  of  value,  nor  a  representative  of  value. 


4  INTRODUCTION. 

The  precious  metals  are  commodities  of  value,  and  do  not,  of  course, 
lose  that  quality,  though  they  gain  another,  by  being  coined.  They 
become,  by  coinage  and  the  law  of  legal  tender,  a  standard  of  pay 
ment.  Every  man  may,  by  law,  claim  payment  in  coins ;  that  is,  for 
any  commodity  previously  sold,  for  any  debt  due,  every  person  may 
exact  the  expressed  equivalent  in  the  commodity  of  gold  and  silver 
assayed  and  coined  at  the  mint  in  denominations  agreeing  with  the 
money  of  account.  All  debts  are  thus  payable  ;  and  it  is  only  be 
cause  the  parties  agree  to  other  modes  of  payment,  that  all  debts  are 
not  thus  paid. 

There  are  many  obstacles  to  the  use  of  coins  in  large  transactions, 
besides  their  great  cost;  among  these,  the  risks  of  theft  and  robbery, 
and  the  care  and  anxiety  which  these  hazards  impose,  the  danger  of 
counterfeits,  the  rapid  wear  and  deterioration  of  coins,  the  frauds  of 
clipping,  punching,  sweating,  and  many  others,  which  are  regarded 
as  severe  grievances  and  trials  in  all  countries  where  an  exclusively 
metallic  currency  has  long  prevailed.  All  these  combined  have  pro 
duced  a  constant  effort  to  escape  the  employment  of  coins  in  large 
transactions.  Gold  and  -silver  coins  have  not  lost  their  interest  in  the 
eyes  of  men ;  they  are  still  the  standard  of  payment,  and  universally 
an  acceptable  medium  of  exchange  ;  but  they  are  far  from  being  the 
universally  employed  medium  of  exchange.  The  men  of  trade  and 
industry,  who  but  receive  money  in  large  amounts  to  pass  it  off  in  the 
same  way,  are  more  concerned  to  escape  trouble,  risk  and  expense  in 
the  matter  of  payment,  than  anxious  to  employ  only  gold  and  silver 
which  have  passed  through  the  mint. 

At  the  present  time,  then,  the  precious  metals  are  employed  only 
as  the  standard  of  payment,  or  legal  tender,  to  be  appealed  to  in  case 
of  disagreement,  a  very  rare  occurrence ;  as  the  medium  of  the  merest 
retail  trade  ;  as  a  reserve  or  security  for  their  issues,  by  banks  of  cir 
culation  ;  and  as  the  medium  of  paying  balances  of  trade,  both 
foreign  and  domestic.  All  these  together  make  not  five  per  cent,  of 
the  operations  of  industry  and  trade  in  this  country,  or  in  Great 
Britain.  We  cannot  adopt  any  safer  criterion  of  the  actual  power 
of  the  precious  metals  as  money,  than  what  we  see ;  their  import 
ance  and  use  is  precisely  what  we  know  to  be  done  with  them  ;  no 
thing  more.  All  the  rest  is  accomplished  by  means  of  credit,  and 
the  many  processes  of  the  credit  system. 

It  must  be  a  great  and  mischievous  fallacy,  then,  to  regard  gold 
and  silver  coins  as  a  sort  of  model  medium  of  exchange,  to  the  cha- 


INTRODUCTION.  5 

racteristics  and  incidents  of  which  all  other  modes  of  interchange 
must  be  made  to  correspond.  This  is  nothing  less  than  an  attempt  to 
fasten  upon  industry  and  commerce  the  very  shackles  and  inconve 
niences  which  they  have  long  been  struggling  to  cast  away.  There  / 
are  many  ways  of  making  payments  without  using  coins,  each  of  which 
may  stand  for  what  it  is  worth,  and  be  employed  according  as  it  may 
be  available,  without  being  tortured  to  work  as  coins  would  have 
worked,  if  they  had  been  employed.  When  two  men  of  business  deal 
largely  together,  keeping  the  record  in  their  books  of  account,  which 
once  in  three  months  are  balanced,  and  the  mutual  debts  thus  paid 
without  any  use  of  coins,  there  is  no  possible  sense  in  which  the  mutual 
payment  thus  effected  co-did  be  made  more  effectual  by  any  reference 
to  coins,  than  by  this  simple  and  economical  method  of  balancing  the 
sums  of  the  various  entries,  debts  and  credits,  expressed  in  money  of 
account,  the  one  against  the  other.  This  mode  of  payment  needs  no 
aid  in  theory,  in  practice,  or  by  analogy,  from  any  employment  of 
coins ;  but  this  mode  of  payment  is  one  of  the  main  devices  of  the  I 
credit  system.  As  the  debts  of  men  of  business  find  their  way  into) 
the  banks,  so  do  their  credits ;  and  the  functions  of  the  banks,! 
stripped  of  their  many  complications,  consist  chiefly  in  balancing  and! 
thus  extinguishing  the  debts  and  credits  of  their  customers. 

There  is  no  ground,  we  think,  for  the  doctrine  that  the  incidents 
and  characteristics  which  attend  a  currency  of  gold  and  silver  should 
be  imitated,  or  even  referred  to,  in  the  processes  of  the  credit  system, 
much  less  be  regarded  as  laws.  All  are  equally  agents  or  processes 
of  commerce,  and  must  be  considered  and  judged  upon  their  respec 
tive  merits,  and  be  employed  according  to  the  opinions  and  sound 
discretion  of  the  parties  concerned.  Coins  become  indispensable  only 
when  claimed  as  a  legal  right. 

The  real  origin  of  the  deposit  banks,  such  as  Amsterdam  and 
Hamburg,  was  the  worn  and  deteriorated  state  of  the  coinage,  which, 
at  that  time,  was  a  grievance  of  a  magnitude  which  only  those  fami 
liar  with  the  commercial  history  of  that  period  can  realize.  This  evil 
is  only  less  now,  because  the  circulation  of  coins  is  nearly  dispensed 
with.  These  deposit  banks  proved  to  be  more  useful  than  their  pro 
jectors  anticipated.  The  circulation  of  the  ownership  of  the  coins 
was  found  to  be  much  more  rapid  and  easy  than  the  circulation  of 
the  coins.  The  wear  and  tear  was  saved,  and  they  were  more  effi 
cient  in  bank  than  out  of  it.  And  it  was  ultimately  revealed  at  Am 
sterdam,  that  the  transfers  and  payments  at  the  bank  could  proceed 


•6  INTROD  UCTION. 

for  scores  of  years  after  the  specie  had  been  removed.  This,  bow- 
ever,  should  have  been  well  understood  from  the  first  establishment 
of  the  bank ;  for,  while  the  ownership  of  the  deposits  was  changing 
every  day,  no  one  had  an  opportunity  of  verifying  the  fact  of  the 
amount  being  actually  in  the  bank.  Every  man  who  accepted  a 
credit  in  the  bank  took  it  upon  his  confidence  in  its  administration. 
The  money  system,  to  this  extent,  thus  resolved  itself,  by  a  sort  of 
(necessity,  into  a  credit  system. 

The  credit  system  was,  in  fact,  a  growth  (ex  necessitate  rei)  of  ne 
cessity.  It  was  indispensable  to  the  advance  of  civilization  and 
industry ;  it  grew  with  the  progress  of  commercial  punctuality  and 
integrity;  it  now  flourishes  only  in  this  soil,  and  cannot  be  destroyed 
where  it  finds  this  aliment  of  its  growth.  It  sent  forth  many  vigorous 
shoots,  in  various  countries,  long  before  it  attained  its  present  mag 
nitude  and  wide  extension.  The  payments  at  the  fairs  so  prevalent 
in  Europe  during  the  middle  ages,  some  of  which  continue  even  down 
to  our  time,  were,  to  a  large  extent,  made  by  setting-off  debts 
against  debts.  Men  learned  to  pay  their  debts  with  their  credits  ; 
and  this  mode  of  payment  only  disappeared  as  the  progress  of  the 
credit  system,  and  the  growth  of  cities,  absorbed  both  the  business 
and  the  payments  of  the  fairs.  These  payments  at  the  fail's  revealed 
that  the  best  fund  with  which  to  pay  debts  is  debts.  Every  debt 
implying  a  credit,  no  one  could  better  employ  his  credits  than  in 
paying  his  debts.  This  required  no  money,  and  was,  therefore,  not 
only  economical,  but  free  from  innumerable  risks  and  troubles  inse 
parably  connected  with  payments  in  money. 

The  Banks  of  Yenice  and  Genoa  were  both  remarkable  forerunners 
of  the  credit  system,  and  beautiful  examples  of  its  economy  and 
power.  The  political  and  commercial  importance  of  these  two  great 
republics  were,  in  a  great  measure,  owing  to  their  respective  banks, 
the  oldest  and  most  important  of  which  we  have  any  account.  The 
lessons  taught  by  these  institutions  have  no  doubt  entered  largely 
into  the  progress  of  the  credit  system,  as  now  developed  ;  but  we 
strongly  insist  that  the  study  of  the  system  of  these  two  banks  is  yet 
necessary  to  any  thorough  comprehension  of  the  power  of  credit,  and 
of  what  is  necessary  to  an  enlarged  and  efficient  financial  system. 

The  capital  of  the  Bank  of  Yenice  consisted  of  a  debt  due  by  the 
republic  to  its  citizens.  The  government  took  the  money,  and  gave 
in  its  place  an  inscription  on  the  books  of  the  bank  for  the  amount, 
bearing  interest.  The  government  returned  the  money  immediately 


INTRODUCTION.  7 

into  the  channels  of  circulation  among  its  citizens,  whilst  the  lenders 
of  the  money  circulated  the  debt  as  a  deposit  in  the  bank.  All  the 
large  payments  of  this  great  commercial  city  were,  for  many  centu 
ries,  paid  in  this  fund,  and  the  gold  and  silver  coins  were  released 
for  the  purposes  of  the  retail  trade,  the  payment  of  foreign  debts, 
and  the  foreign  expenditures  of  the  republic.  The  government  of 
Yenice  dealt  faithfully  with  these  holders  of  stock  in  the  bank,  not 
only  paying  the  interest  punctually,  but  redeeming  any  amount  which 
seemed  superfluous,  or  beyond  the  demand  of  the  public.  This 
policy  not  only  kept  the  bank  fund  at  par  with  specie,  but  more 
than  twenty  per  cent,  above  it.  The  bank  was  always  open  to 
further  loans  to  the  government,  when  such  investment  was  in  de 
mand.  The  capital  of  the  bank  fluctuated  in  amount  according  to 
the  wants  of  the  people,  and  not  according  to  the  wants  of  the  public 
treasury. 

The  Bank  of  Yenice  performed  its  functions  for  over  five  hundred 
years,  with  an  uniformity  of  success,  and  immunity  from  censure  or 
complaint,  which  no  other  currency  has  enjoyed  for  a  tithe  of  that 
period.  During  that  time  of  vast  commerce  and  immense  public 
expenditure,  the  republic  had  incessant  trouble  with  their  own  and 
foreign  coinage,  and  very  many  stringent  regulations  were  made  and 
enforced,  to  cure  evils  and  prevent  abuses  ;  but  we  have  no  record 
of  abuses  on  the  part  of  the  bank,  or  of  injuries  inflicted  by  it  upon 
the  people. 

Believing  that  the  commercial  fairs  of  Europe,  and  the  Banks  of 
Yenice  and  Genoa,  were  capable  of  imparting  historical  lessons  not 
yet  properly  appreciated,  we  have  brought  them  more  prominently 
before  the  reader  than  has  been  done  in  any  work  upon  money  or 
currency.  We  have,  in  later  times,  achieved  a  method  of  clearing 
debts  between  banks ;  but  a  lesson  may  be  learned  from  the  pay 
ments  at  the  fairs,  of  successful  clearing  between  individuals.  There 
is  no  reason,  in  theory  or  in  practice,  why  clearing  may  not,  to  a 
considerable  extent,  be  practised  between  individuals  mutually  in 
debted.  The  history  of  these  fairs  furnishes  abundant  exemplifica 
tion  of  this  most  economical  and  effective  of  all  the  modes  of  pay 
ment. 

The  history  of  these  celebrated  banks  furnishes  other  lessons 
which  will  richly  repay  the  most  careful  attention.  They  demon 
strated  the  efficacy  of  circulating  deposits  as  a  means  of  payment, 
and  that  the  deposits  were  just  as  effective  when  they  consisted 


8  INT  RODUCTION. 

of  a  debt  due  from  the  government,  as  if  they  were  gold  or  silver ; 
and  they  showed  that  it  was  possible  to  keep  the  amount  of  this 
public  debt,  as  held  by  the  depositors  in  the  banks,  within  a 
range  of  amount  which  not  only  prevented  depreciation,  but  kept 
the  deposits  always  from  fifteen  to  thirty  per  cent,  above  gold  and 
silver. 

The  distinction  between  credit  —  the  confidence  which  men  place 
in  each  other,  and  which  induces  them  to  defer  the  day  of  payment 
for  goods  purchased  —  and  the  credit  system  has  not,  in  our  view, 
been  sufficiently  observed.  The  credit  system  springs  from  credit ; 
there  could  be  no  credit  system  without  the  exercise  of  that  confi 
dence  which  accepts  a  future  instead  of  a  present  payment.  The  two 
processes  are,  however,  wholly  different;  credit  refers  to  confidence, 
and  to  the  postponement  of  payment ;  the  credit  system  refers  chiefly 
to  the  mode  of  payment.  It  is  that  system  by  which  the  payments 
for  commodities  are  separated  from  the  transactions  to  which  they 
belong,  and  made  a  separate  business.  More  than  nine-tenths  of  all 
the  payments  of  industry  and  trade  are  effected  through  the  processes 
of  the  credit  system.  The  payments  thus  made  are  in  no  degree 
connected  with,  nor  dependent  upon  any  reference  to,  or  any  employ 
ment  of  the  precious  metals.  The  credit  system  is  that  by  which 
men  set-off  the  debts  which  others  owe  them  against  those  which 
they  owe  to  others.  This,  of  all  modes  of  payment,  involves  the 
least  risk,  and  is  the  most  effective,  satisfactory  and  economical. 
No  currency  can  be  more  suited  to  pay  a  man  with  than  that  which 
he  has  issued  himself.  It  is  that  which  the  credit  system  employs ; 
and  it  may  be  added,  that  this  system  keeps  books  of  account  for 
those  who  avail  themselves  of  it,  in  which  they  take  credit  for  what 
others  owe  them,  and  are  debited  with  what  they  owe  others. 

The  magnitude  and  complication  of  the  credit  system  conceal 
its  details,  and  render  it,  as  a  whole,  difficult  of  comprehension.  It 
is  only  by  severe  and  continued  analysis  that  the  processes  of  this 
vast  system  of  payments  can  be  even  partially  displayed  to  the  view 
of  the  reader. 

Books  of  account  may  be  regarded  as  one  of  its  most  effective 
agencies.  The  merchant  who  debits  a  manufacturer  five  thousand 
dollars  for  raw  materials  in  the  course  of  six  months,  and  gives  him 
credit  for  finished  goods  to  the  amount  of  seven  thousand  dollars  in 
the  same  period,  is  very  willing  to  unite  with  his  customer  in  dis 
charging  ten  thousand  dollars  of  this  debt  by  balancing  the  account 


INTRODUCTION. 

between  them,  leaving  only  two  thousand  to  be  paid  otherwise  than 
by  the  balance.  The  merchant  and  his  customer  each  receive  pay 
ment  of  five  thousand  dollars  without  money  or  currency.  Each  is 
paid  with  the  debt  he  owes ;  the  book  is  the  evidence  of  the  debts, 
and  the  balancing  is  the  act  of  payment. 

The  issue  of  promissory  notes  by  each  of  these  parties  for  the  five 
thousand  dollars  does  not  alter  the  nature  of  the  transaction,  but  only 
the  mode  of  payment.  The  notes,  instead  of  the  books,  become 
evidences  of  debt ;  and  if  the  notes  are  exchanged  directly,  no  other 
payment  is  necessary.  If  the  merchant  finds  it  for  his  interest  to 
negotiate  the  note  held  by  him,  the  complication  commences.  But 
the  debts  to  be  paid  are  not  increased ;  the  real  nature  of  the  busi 
ness  remains  the  same ;  the  parties  have  only  changed.  The  mer 
chant  receives  the  amount  payable  to  him  from  the  person  to  whom 
he  negotiated  the  note ;  and  with  the  amount  so  received  he  can  pay 
the  note  given  by  him  to  his  customer ;  and  this  customer  can,  with 
the  amount  so  received,  pay  the  amount  of  his  note  negotiated  by 
the  merchant.  It  is  the  same  when  both  parties  negotiate  the  notes 
they  take ;  both  remain  debtors  for  the  notes  they  gave,  and  both 
receive  the  amount  needful  to  pay,  from  the  parties  to  whom  they 
transfer  the  notes.  It  is  thus  with  all  who  give  and  take  notes  in 
the  course  of  their  business  ;  they  use  the  notes  they  receive  to  effect 
the  payment  of  the  notes  they  give ;  and  it  is  the  same  with  bills  of 
exchange. 

To  effect  this,  further  complications  and  devices  become  necessary. 
A  class  of  men  is  formed,  who  make  it  their  business  to  deal  in 
these  securities,  or  evidences  of  debt.  If  a  banker  or  broker  pur 
chases  the  two  notes  given  by  the  merchant  and  his  customer,  it  is 
obvious  that  both  receive  the  means  from  him  to  pay  the  notes, 
of  which  he  has  become  holder  and  owner.  The  process  of  payment 
between  them  will  be  very  simple,  if  the  banker  merely  give  each  of 
the  two  parties  credit  on  his  books  for  the  proceeds  of  the  notes  pur 
chased  of  them.  Their  respective  checks  011  these  credits  pay  off 
the  whole  indebtedness,  except  the  interest  deducted  for  the  time 
the  notes  had  to  run,  which  interest  they  must  pay  in  other  funds. 

Banks  become,  in  this  way,  substantially  book-keepers  for  their 
customers.  They  discount  promissory  notes  and  bills  of  exchange 
at  their  instance,  giving  them  credit  in  account  for  the  proceeds  ;  the 
banks  can  well  afford  to  take  checks  upon  these  proceeds  in  pay 
ment,  because  they  give  nothing  else  for  the  paper ;  and  every  check 


10  INTRODUCTION. 

given  in  payment  reduces  the  liability  of  the  bank  to  that  amount. 
The  customers  of  the  banks  are  indebted  in  large  amounts  for  notes 
given,  and  are  creditors  in  large  amounts  for  notes  received ;  the  notes 
are  all  either  discounted  by  the  banks,  or  placed  in  them  for  collec 
tion  ;  and  the  banks  thus  represent  both  creditors  and  debtors.  So 
far  as  the  banks  have  issued  bank-notes,  or  given  credit  for  promis 
sory  notes  and  bills  of  exchange,  they  can  receive  them  in  payment, 
for  it  is  their  own  currency.  Their  liabilities  to  the  public  are  for 
bank-notes,  and  credits  on  deposit ;  and  the  return  of  these  in  pay 
ment  is  a  redemption,  to  that  extent,  of  their  liability. 

The  books  of  the  banks  furnish,  thus,  a  mode  of  adjustment  by 
which  the  customers  are  enabled  to  apply  their  credits  to  the  pay 
ment  of  their  debts.  The  profit  or  commission  of  the  banks  is  the 
interest  for  the  time  the  discounted  notes  have  to  run.  Promissory 
notes  placed  in  the  banks  for  collection  are  usually  paid  in  the  same 
way  :  the  banks  can  afford  to  take  their  own  currency  for  these 
also,  because  it  is,  to  that  extent,  a  further  redemption  of  their  debt 
to  the  public.  So  far  as  the  indebtedness  of  the  customers  of  the 
banks  is  mutual,  it  is  readily  extinguished,  for  to  that  amount  the 
debtors  hold  credits  sufficient  to  make  their  payments.  Every  one 
who  has  a  balance  to  pay,  must  do  it,  of  course,  to  the  satisfaction 
of  the  bank.  It  is  by  the  operation  of  this  process  that  the  dis 
charge  of  much  the  largest  portion  of  the  debts  annually  paid  in 
the  United  States  is  effected. 

This  process  continues  with  a  regular  step,  because  the  notes  held 
by  the  banks  mature  day  by  day,  and  must  be  met ;  the  proper  fund 
to  pay  them  is  that  which  the  banks  gave  for  them,  and  this  is  not 
only  the  most  abundant,  but  the  most  accessible.  The  demand  for 
this  fund  is,  therefore,  as  strong  and  constant  as  the  necessity  of 
paying  commercial  paper  at  maturity.  In  becoming  chief  creditors 
of  the  men  of  business,  the  banks  issue  a  currency  which  would  not 
otherwise  exist,  and  which  becomes  a  medium  specially  adapted,  in 
quantity  and  kind,  to  pay  every  debt  due  to  them.  The  debts  pay 
able  at  the  banks  are  the  proper  absorbents  of  the  currency  issued 
by  the  banks.  This  currency  is  good,  and  attains  circulation  be 
cause  it  is  in  demand,  not  only  by  all  the  debtors  of  the  banks,  but 
by  all  who  are  their  debtors.  Such  a  large  and  constant  demand, 
in  fact,  makes  this  currency  available  to  a  very  wide  extent. 

The  debtors  of  the  banks  become  such  by  giving  promissory  notes 
for  commodities  of  trade  in  general  use ;  and  they  stand  ready  to 


INTRODUCTION.  11 

receive  for  these  commodities  that  bank  currency  which  will  pay 
their  debts.  The  tendency  of  this  currency  is,  therefore,  and  should 
be,  to  flow  back  to  the  banks  in  extinguishment  of  debts  there 
payable. 

In  this,  as  in  many  other  things,  where  the  largest  advantage  is 
found,  there  is  found  also  the  greatest  danger  of  abuse.  The  great 
demand  for  this  currency,  arising  from  the  urgent  necessity  under 
which  debtors  to  the  banks  are  placed,  of  paying  their  notes  as  they 
mature,  invests  the  bank  currency  with  the  full  power  of  money ;  for 
that  which  will  pay  such  a  vast  amount  of  debt  is  needed  by  so 
many,  that  it  will  purchase  whatever  can  be  obtained  for  money. 
The  banks  seem  thus  to  have  it  in  their  power  to  manufacture 
money,  and  they  are  importuned  to  lend  this  currency  as  if  it  were 
money.  Their  power  of  safely  issuing  it  is  limited  strictly  to  the 
demands  of  those  who  require  it  to  pay  debts  maturing  in  the  banks. 
It  can  only  be  good  when  the  debtors  of  the  banks  are  able  to  pur 
chase  it  from  the  hands  of  the  public,  and  when  they  do  so  purchase 
it  to  pay  their  debts  in  bank.  It  is  not  money ;  it  has  only  this 
function  of  paying  debts  in  bank,  and  circulating  as  a  substitute  for 
money,  under  the  stimulus  of  the  demand  for  it  by  the  debtors  of  the 
banks. 

The  banks  have,  however,  at  various  times  and  places,  fallen 
largely  into  the  error  of  lending  their  currency  as  money  ;  and  there 
have  been  many  occasions  and  periods  when  their  debtors  became 
unable  to  return  it  to  the  banks ;  and  then  it  was  often  found  that 
the  promises  of  the  bank  were  worth  not  so  much  as  the  paper  on 
which  they  were  printed.  No  more  of  this  currency  can  be  issued 
safely  than  the  banks  can  find  not  merely  safe  men  to  borrow,  but 
men  who  have  something  with  which  they  can  actually  redeem  it 
from  the  hands  of  the  public,  and  restore  it  to  the  issuers.  If  the 
circulation  is  not  kept  active  by  the  demand  of  the  debtors,  and  if 
they  do  not  return  it  at  as  rapid  a  rate  as  that  at  which  it  is  issued, 
payment  will  be  demanded  of  the  banks  at  a  rate  with  which  they 
cannot  possibly  comply.  This  abuse  of  issuing  currency  without 
due  precaution,  and  in  amounts  wholly  unjustifiable,  is  the  most  com 
mon,  and  one  of  the  worst  abuses  of  banking ;  and  it  occurs  from 
ignorance  far  more  frequently  than  from  fraud. 

The  remedy  for  these  evils  which  has  been  most  relied  on,  is  that 
of  placing  the  banks  under  stringent  obligations  to  pay  their  cur 
rency  on  demand  in  specie.  This  would  be  a  complete  remedy,  if 


12  INTRODUCTION. 

compliance  were  possible  ;  but  that  is  not  the  case  —  far  from  it.  It 
,  involves  a  stock  of  the  precious  metals  in  the  country  equal  to  the 
deposits  and  circulation  of  the  banks,  and  applicable  to  this  purpose 
of  remaining  in  the  banks  as  a  security  for  their  issues.  Security, 
absolute  security,  should  be  required  of  the  banks ;  but  it  is  surely 
an  error  to  assume  that  the  security  must  be  gold  or  silver.  There 
are  many  ways  of  securing  debts,  but  gold  and  silver  are  rarely 
thought  of  as  security  ;  yet  it  is  required  of  the  banks  to  three  times 
the  quantity  in  the  country.  The  banks  are  required  to  hold  this 
security  for  public  benefit,  which  involves  two  great  absurdities; 
one,  that  the  banks  should  bind  themselves  to  perform  an  impossi 
bility  ;  the  other,  that  they  should  be  the  holders  of  the  security  on 
which  the  public  is  to  rely. 

The  fact  that  bank  currency  can,  to  a  certain  extent,  perform  the 
functions  of  money  is  only  incidental  -,  it  is  not  its  office,  nor  special 
purpose.  Because  its  special  use,  however,  gives  it  this  power,  and 
therefore  opens  a  wide  door  of  temptation  to  abuses  and  over-issue, 
security  becomes  necessary  not  only  as  a  restraint,  but  to  make  good 
losses  and  damage.  This  security  should,  therefore,  not  only  be 
such  as  can  be  given,  but  such  as  would  be  always  safe  and  avail 
able  ;  and  the  banks  should  not  be  the  holders  of  it. 

The  exaction  of  payment  on  demand  by  the  banks  in  coins  for  all 
their  issues,  is  not  only  a  demand  with  which  they  cannot  comply, 
but  it  has  served  further  to  obliterate  the  distinction  between  bank 
issues  and  money.  So  long  as  no  demand  is  made  upon  the  banks,  it 
is  assumed  that  their  issues  are  convertible  at  the  will  of  the  holder. 
They  obtain,  by  this  means,  a  higher  credit  and  wider  circulation  ; 
and  that  is  looked  upon  as  money  which  is,  by  theory,  convertible, 
and  which  is  assumed  to  be  so  in  practice.  The  temptation  to  both 
banks  and  borrowers  is  thus  increased,  and  the  volume  of  bank 
issues  swelled,  until  a  collapse  becomes  inevitable.  As  the  special 
function  of  bank  currency  is  to  pay  debts  to  the  banks,  the  rule  of 
issue  should  be  not  what  they  can  put  into  circulation,  whether  depo 
sits  or  notes,  but  what  they  can  recall  by  the  payments  of  their 
debtors ;  for  if  they  do  not  return  the  notes,  the  banks  can  never 
rede-em  them. 

In  all  the  processes  of  industry  and  commerce,  there  is  probably 
no  absurdity  tolerated  equal  to  that  practised  by  the  banks,  of  dis 
counting   the  paper  of  their  customers  running   from   two  to   six 
*  months,  arid  giving  their  bank-notes  or  credits  payable  on  demand 


INTRODUCTION.  13 

in  coins.  The  persons  who  give  these  notes  take  from  two  to  six 
months  to  arrange  for  their  payment ;  the  banks  intervene,  abolish 
the  credit  which  the  course  of  trade  dictated  to  the  parties,  and  be 
come  responsible  for  the  whole  instanter. 

The  banks  of  the  United  States  incur  this  liability  every  year,  to 
the  extent  of  not  less  than  $3,000,000,000,  and  are  at  no  time  free 
from  a  demand  for  less  than  $500,000,000  in  specie,  a  quantity  more 
than  double  that  in  the  country,  and  tenfold  that  held  by  the  banks. 
There  is  no  conceivable  plan  by  which  the  banks  could  fulfil  this  en 
gagement.  It  would  be  impossible  for  the  drawers  of  the  paper  thus 
taken  by  the  banks  to  anticipate  the  maturity  of  their  obligations, 
and  pay  them  in  coins ;  any  law  framed  to  enforce  such  anticipation 
would  be  regarded  as  the  height  of  absurdity  and  injustice.  It  is 
this  fearful  blunder  which  has  made  banks  of  circulation  the  terror 
of  many  minds,  and  the  object  of  such  prejudice  and  reproach  as 
scarcely  has  a  parallel.  Whilst  they  fulfil  their  legitimate  functions 
of  purchasing  individual  paper  with  their  own  currency,  and  receiv 
ing  that  currency  again  in  payment,  their  usefulness  is  admitted  and 
extolled  ;  but  whenever  the  sole  test  of  their  soundness  is  applied, 
and  payment  in  coins  for  their  issues  is  demanded,  they  have  no 
choice  but  to  be  ruined,  or  to  ruin  their  customers.  They  cannot 
pay  their  notes  and  deposits  in  gold  or  silver,  and  must  suspend,  or 
commence  a  contraction  of  the  currency  which  works  a  public  injury 
many  times  greater  than  the  capital  of  the  banks  concerned  ;  it  not 
only  ruins  individuals,  but  causes  the  sacrifice  of  a  vast  amount  of 
property,  and  works  a  still  greater  loss  by  depreciation. 

If  this  test  of  paying  all  liabilities  on  demand  were  applied  to  the 
richest  firms  in  the  nation,  they  would  all  fail.  That  the  banks 
undertake  thus  to  pay  does  not  alleviate  the  absurdity ;  for,  on  the 
one  hand,  they  should  not  be  permitted  to  undertake  an  impossi 
bility  ;  and  on  the  other,  no  reliance  should  be  placed  upon  a  secu 
rity  absolutely  unavailable. 

We  impose  upon  the  banks,  as  a  test  of  their  solidity,  a  condition 
whichfwhen  the  time  of  trial  arrives,  becomes  a  scourge  to  the  whole 
community  in  which  they  are  situate.  It  is  a  test  which  enables  the 
banks  to  resist  the  fulfilment  of  their  engagements  by  inflicting  a 
grievous  calamity  upon  the  public.  When  called  upon  to  pay  on 
demand,  they  resist  it  with  all  the  powers  of  attack  and  defence  they 
can  wield  ;  and  they  claim  to  be  sound,  not  unfrequently,  because 
they  have  hurt  the  public  more  than  the  public  has  damaged  them. 


14  INTRODUCTION. 

In  place  of  this  dangerous  condition,  the  banks  should  be  required 
to  give  ample  security  for  both  their  notes  and  deposits,  and  that 
security  should  be  lodged  with  the  State ;  they  should  be  required, 
under  severe  penalties,  to  keep  their  issues  at  par  with  specie. 
Their  notes  and  deposits  should,  at  all  times,  be  receivable  for  any 
debts  due  to  them,  or  payable  at  their  counters ;  but  they  should  not 
be  bound  to  pay  specie  in  any  other  way  than  it  is  payable  by  their 
customers ;  that  is,  at  the  maturity  of  the  paper  discounted  or  pur 
chased  by  them.  If  the  individual  paper  taken  by  the  banks  averages 
two  months  to  maturity,  then  their  customers  have  these  two  months 
in  which  to  employ  the  bank-notes  and  deposits  issued  to  them  in 
payment  of  their  debts  in  and  out  of  bank ;  and  during  that  period 
of  adjustment,  the  banks  should  be  exempt  from  any  demand  for 
specie  upon  their  issues  so  employed,  both  because  they  are  perform 
ing  a  legitimate  office  for  which  they  are  specially  adapted,  and  from 
which  they  could  not  be  withdrawn  without  serious  evil ;  and  because 
the  credit  on  the  paper  for  which  they  were  exchanged  is  not  ex 
pired.  The  claims  of  the  banks  on  the  public  ought  to  proceed  pari 
2)assu  with  the  claims  of  the  public  on  the  banks. 

On  this  principle,  the  issues  of  the  banks  would  be  absorbed  in 
payment  of  debts  due  to  them.  If  not  so  absorbed,  the  banks  should 
only  receive  in  payment  that  which  will  redeem  them  when  presented. 
Whatever  liabilities  of  the  bank  are  not  thus  redeemed,  should  be 
amply  covered  by  available  security. 

The  practice  of  paying  or  extinguishing  debts  by  the  process  of 
clearing,  now  becoming  so  common  among  the  banks,  is  not  new. 
Three  centuries  ago,  a  very  large  proportion  of  the  payments  of  cen 
tral  Europe  were  made  in  that  way.  Then  it  was  effected,  on  a 
large  scale,  between  individuals ;  now  it  is  wholly  confined  to  the 
banks.  Then  it  was  the  chief  mode  of  accomplishing  the  vast  pay 
ments  arising  from  the  trade  of  the  multitudinous  fairs  of  that  period ; 
and  it  so  continued,  until  other  modes  of  commerce  supplanted  that 
of  the  fairs.  The  clearing  at  the  fairs  was  simply  a  process  of  set- 
ting-off  debts  against  debts  —  the  same,  in  effect,  as  balancing  book 
accounts.  A.  said  to  B.,  you  owe  me  a  thousand  florins;  pay  that 
amount  for  me  to  C.,  to  whom  I  am  in  debt.  This  being  done,  A. 
is  acquitted,  and  thus  the  process  goes  on.  It  is  obvious  that  the 
final  balances,  among  hundreds  assembled  for  that  purpose,  may  be 
reached  by  setting-off  mutual  debts,  and  drawing  verbally  on  each 
other  at  sight,  where  the  process  involves  more  than  two  persons,  and 


INTRODUCTION.  15 

thus  continuing  to  pay,  until  the  result  is  reached  of  those  who  have 
more  coming  to  them  than  they  had  to  pay,  and  of  those  who  had 
more  to  pay  than  they  had  due  to  them.  The  conclusion  of  the  whole 
was,  that  the  balances  to  pay  were  the  exact  amount  of  those  to 
receive. 

The  mode  of  payment  which  had  most  prominence  in  large  trans 
actions,  after  clearing  began  to  lose  its  importance  with  the  decay 
of  the  fairs,  was  that  of  circulation.  This  was  practised  not  only  at 
the  great  Banks  of  Venice  and  Genoa,  but  also  at  the  deposit  banks 
which  succeeded  them.  The  same  money  in  a  bank,  or  the  same 
credits  upon  the  books  of  a  bank,  was  by  this  method  kept  circulating 
or  passing  from  person  to  person,  accomplishing  a  continued  circle 
of  payments.  Its  effectiveness  did  not  come  to  an  end,  for  it  moved 
in  a  circle  embracing  nearly  the  same  parties,  gradually  passing  from 
the  men  of  one  generation  to  those  of  another.  This  circulation  is 
still  in  full  vigor  in  the  Bank  of  Hamburg,  and  other  survivors  of  the 
deposit  banks  of  the  seventeenth  century  ;  but  it  has  no  counterpart 
in  our  more  modern  institutions.  The  deposits  in  our  banks  are  the 
proceeds  of  discounted  commercial  paper.  The  credits  issued  by  the 
banks,  of  which  these  deposits  are  composed,  are  absorbed  and 
wholly  extinguished  whenever  they  are  paid  to  the  banks.  Their 
place  is  supplied  continually  by  new  discounts  and  new  credits. 

This  mode  of  payment  by  circulation  of  the  same  money,  or  the 
same  fund,  as,  for  instance,  national  debt,  differs  from  clearing.  In 
the  former,  it  passes  from  hand  to  hand,  performing  all  the  payments 
its  successive  owners  can  effect  with  it.  If  these  owners  were  seated 
at  one  table,  they  could  circulate  a  sum  in  coins  from  hand  to  hand 
to  the  same  effect,  and  see  the  money  before  them  at  the  same  time. 
But  if  seated  at  the  same  table,  they  could  extinguish  a  large  portion 
of  their  debts  by  simply  exhibiting  their  claims,  and  balancing  or 
clearing  them,  so  far  as  mutual,  and  by  verbal  transfers,  as  in  the 
fairs,  until  the  final  balances  were  reached,  seldom  over  five  per  cent. 
on  the  amount  paid. 

Clearing  is,  beyond  all  question,  the  simplest,  the  most  economi 
cal,  and  when  applicable,  the  most  efficient  of  all  modes  of  paying 
debts.  It  is  precisely  analogous  to  balancing  accounts.  Parties 
who  are  in  business  relations  arrange  to  ascertain  daily,  or  at  con 
venient  times,  the  state  of  their  mutual  claims ;  and  having  verified, 
extinguish  them  by  set-off.  The  banks  of  New  York  extinguished 
among  themselves  in  that  way,  in  1857,  upwards  of  $7,000,000,000, 


16  INTRODUCTION. 

or  upwards  of  $20,000,000  each  day,  upon  which  the  daily  balances 
did  not  exceed  five  per  cent.  This  enormous  sum  is  cleared  in  New 
York  alone,  without  the  use  of  any  currency  or  medium  of  payment 
whatever.  It  is  done  by  evidences  of  debt  bearing  the  items  of 
mutual  claim,  by  a  statement  of  the  amounts,  and  by  the  processes 
of  a  balance. 

The  banks  in  other  cities  avail  themselves  also  of  the  economy  and 
facility  of  this  process.  These  clearing  establishments  have  been 
gradually  improving  their  methods,  and  we  believe  there  is  yet  room 
for  progress  in  that  respect,  not  only  as  between  banks,  but  that  the 
same  principles  and  processes  are  susceptible  of  many  applications 
between  individuals.  This  would  not  only  be  an  advantage  to  those  who 
may  adopt  them,  but  would  exert  considerable  influence  in  reducing 
friction  in  the  operation  of  the  money  and  credit  systems.  A  com 
prehensive  treatise  on  this  subject,  in  which  the  subject  should  be 
thoroughly  treated  in  reference  to  its  possible  applications  to  clear 
ing  between  individuals,  would  be  an  important  addition  to  commer 
cial  literature.  The  fact  that  those  who  give  credit  to  the  greatest 
extent  take  it  from  others  most  liberally,  and  that  the  object  of  such 
persons  is  to  apply  their  credits  to  pay  their  debts,  furnishes  sufficient 
ground  upon  which  to  build  such  an  inquiry. 

The  subject  of  interest  has  engaged  our  attention  upon  only  two 
or  three  points.  Interest  is  almost  exclusively  considered  in  the 
light  of  a  charge  for  the  use  of  money.  No  adequate  explanation 
of  the  term  interest,  as  now  very  generally  employed,  can  be  given 
from  that  point  of  view.  Strictly  speaking,  very  little  money  is  lent 
upon  interest ;  there  is  probably,  in  the  United  States,  ten  times  as 
much  interest  paid  as  there  is  money  lent  upon  interest.  We  do  not 
regard  the  proceeds  of  discounted  notes,  whether  they  take  the 
shape  of  bank-notes  or  bank  deposits,  as  money.  They  are  merely 
the  credits  or  securities  of  the  bank  substituted  for  those  of  indi 
viduals.  Yet  these  bank-notes,  but  more  especially  the  deposits,  are 
really  the  chief  medium  of  payment.  The  fund  upon  which  interest 
is  chiefly  paid,  is  that  which  stands  in  the  banks  under  the  name  of 
deposits.  The  two  great  items  of  interest  paid  in  this  country  are 
the  deduction  made  from  notes  and  bills  of  exchange  sold  or  dis 
counted,  and  loans  of  amounts  deposited  in  the  banks,  the  proceeds 
of  discounted  paper. 

Gold  and  silver  are  seldom  lent  upon  interest;  they  are  never 
Bought  for  as  a  medium  of  payment,  because  a  check  upon  a  bank  is 


INTRODUCTION.  IT 

preferred.  Gold  will  command  no  higher  rate  of  interest  than  a 
credit  in  bank.  When  interest  has  advanced  even  one  or  two  hundred 
per  cent.,  there  is  no  corresponding  advance  in  the  precious  metals. 
The  current  rate  of  interest  depends  upon  the  facility  of  obtaining 
the  needful  supply  of  that  fund  which  is  usually  employed  in  paying 
debts.  It  is  not  the  plenty  or  scarcity  of  this  fund  which  determines 
the  rate  of  interest,  so  much  as  the  disposition  of  the  holders.  The 
fluctuations  in  its  amount  do  not  correspond  with  the  fluctuations  of 
interest.  It  often  happens  that  the  deposits  in  the  banks  are  largest 
when  the  rate  of  interest  is  highest. 

There  are  many  speculations  about  the  level  of  the  precious 
metals,  about  money  flowing  to  one  country  and  from  another  :  this 
flux  and  reflux,  when  applied  to  problems  of  interest,  furnish  no 
light.  Within  the  range  of  trade,  foreign  or  domestic,  the  precious 
metals  receive  little  impulse  in  any  direction  from  the  rate  of  in 
terest  ;  nor  do  they  exert  upon  it  any  appreciable  influence,  except 
so  far  as  the  loss  of  specie  by  the  banks  may  lead  to  a  contraction 
of  the  currency. 

We  have  discussed  the  topic  of  prices  more  elaborately,  perhaps, 
than  was  necessary  for  our  purpose,  which  was  chiefly  to  show  that 
the  relation  between  the  quantity  of  money,  or  currency,  and  prices 
was  not,  by  any  means,  so  close  as  many  have  supposed.  The 
notion  long  prevalent,  that  prices  were  exactly  adjusted  to  the  quan 
tity  of  currency,  is  shown  to  have  been  long  since  exploded.  Among 
the  innumerable  influences  which  go  to  determine  the  general  range 
and  fluctuation  of  prices,  the  quantity  of  money  or  currency  is  found 
to  be  one  of  the  least  effective. 

This  subject  is  specially  important  as  bearing  upon  the  results  of 
fluctuations  in  the  issues  of  banks.  Besides  the  fact,  that  quantity 
of  currency  has  less  effect  upon  prices  than  is  generally  supposed,  it 
is  to  be  taken  into  account  that,  for  all  the  currency  issued  by  the 
banks,  there  is  a  special  and  constant  demand  from  the  debtors  of 
the  banks,  which  prevents  it  from  having  as  much  influence  as  it 
might  otherwise  have.  The  debtors  of  the  banks  having  in  their 
possession  the  whole  range  of  commodities  to  which  prices  apply, 
are  offering  them  for  this  currency,  to  secure  it  for  their  con 
stantly  recurring  payments.  Their  constantly  maturing  obligations 
do  not  permit  them  to  hold  out  for  extra  prices. 

We  have  dwelt  at  some  length  upon  the  subject  of  public  pay 
ments,  with  the  view  of  turning  the  minds  of  financial  inquirers  to  a 
2 


18  INTRODUCTION. 

topic  which  has  received  too  little  attention.  Public  taxation  has 
been  largely  discussed  in  many  countries-;  but  the  mere  question  of 
the  best  mode  of  effecting  public  payments  has  not  received  the 
consideration  it  deserves.  The  history  of  productive  industry  and 
trade  shows  that,  for  the  last  six  hundred  years,  where  civilization 
has  been  highest,  efforts  to  improve  the  modes  of  payment  have 
been  incessant  and  most  successful.  From  the  origin  of  the  Bank 
of  Venice  to  the  present  day,  in  Europe,  there  has  been  no  rest  from 
attempts  to  facilitate  payments,  and  economize  the  means  and  methods 
of  payment.  The  motives  which  have  so  long  and  so  continuously 
operated  on  the  ranks  of  industry  and  of  trade  must  have  been  not 
only  strong,  but  well  founded. 

That  which  has  so  constantly  occupied  the  minds  of  men  of  busi 
ness  cannot  be  beneath  notice  of  governments,  under  the  same  cir 
cumstances.  If  the  annual  receipts  into  the  treasury  of  France  are 
$300,000,000  ;  if  the  annual  receipts  into  that  of  Great  Britain  are 
$260,000,000;  and  if,  in  the  United  States,  the  treasury  annually 
receives  $75,000,000,  the  mere  method  of  receiving  and  disbursing 
these  vast  revenues  must  become  an  important  consideration  —  very 
important,  if  we  take  the  conduct  of  the  most  intelligent  men  of  busi 
ness,  for  ages  past,  as  a  criterion.  This  importance  refers  to  the 
people  from  whom  the  revenues  are  collected,  as  well  as  to  those  to 
whom  they  are  paid,  and  to  the  government  itself,  in  regard  to  the 
facility 'and  economy  of  its  financial  operations. 

A  financial  system  should  be  specially  adapted  to  the  habits  and 
customs  of  the  people  for  whom  it  is  designed.  No  government  can 
long  depart  from  the  usages  of  its  people,  or  disregard  their  modes 
of  business,  without  paying  some  penalty,  soon  or  late,  for  the  mis 
take.  We  regard  the  present  mode  of  administering  the  treasury 
of  the  United  States  as  involving  this  error.  The  habit  of  the 
people  to  employ  paper  currency  and  credit  wherever  they  are  appli 
cable,  is  almost  universal.  This  use  would  be  still  more  general  and 
uniform,  but  for  restrictive  laws,  which  the  abuses  of  banking  have 
(provoked.  In  the  face  of  this  custom  of  the  country,  the  public 
treasury  has  rejected  the  use  of  paper  currency  altogether,  and 
reserves  for  itself  an  exclusive  currency  of  gold  and  silver.  This 
policy  has  had,  during  nearly  its  whole  existence,  the  extraordinary 
support  of  the  California  gold-mines,  and  has  not,  therefore,  deve 
loped  fully  the  harsh  and  evil  tendencies  with  which  it  is  fraught. 
The  day  is  approaching  when  this  system,  if  continued  in  its  pre- 


INTRODUCTION.  19 

sent  shape,  will  create  a  financial  disturbance  great  enough  to  shake 
the  industry  of  the  country  to  its  centre,  and  endanger  any  adminis 
tration  which  may  attempt  to  uphold  it. 

We  have  compared  our  exclusive  system,  as  administered  under 
the  act  of  1846,  with  the  financial  systems  of  France  and  Great 
Britain,  and  find  nothing  in  either  to  justify  or  encourage  us  in 
continuing  a  scheme  of  finance  so  fraught  with  peril  to  the  inte 
rests  of  labor  and  trade.  We  refer  to  the  manner  in  which  that  act 
has  been  carried  out,  not  to  its  provisions  as  they  stand  in  the 
statute  book.  Our  system  assumes  at  once  the  attitude  of  being 
independent  of  the  people  and  the  commercial  institutions  of  the 
country.  It  has  been  very  aptly  called  the  Independent  Treasury, 
for  it  admits  no  sympathy  and  no  relations  with  the  business  or  the 
interests  of  the  people.  In  Great  Britain,  the  Exchequer  leans  upon 
the  Bank  of  England,  the  greatest  commercial  institution  of  the 
country ;  and  in  this  way  a  sympathy  between  the  movements  of  the 
Exchequer,  or  public  treasury,  is  established,  which  runs  through 
and  tempers,  if  it  does  not  control  its  whole  operations.1  Besides 

1  The  following  account,  given  by  the  "Economist,"  No.  799,  of  December, 
1858,  page  1400,  a  commercial  journal  of  the  highest  character,  published  in 
London,  shows  how  carefully  the  authorities  of  the  Exchequer  look  to  the  in 
terests  and  convenience  of  those  from  whom  the  revenue  is  collected.  Com 
plaints  had  been  made  of  the  trouble  and  risk  of  attending  to  pay  duties,  even 
in  notes  of  the  Bank  of  England. 

"At  length,  in  1854,  the  treasury,  of  its  own  accord,  devised  a  scheme  of 
which,  as  it  has  been  in  practice  now  nearly  four  years,  the  success  and  effi 
ciency  have  been  fully  tested. 

"In  the  year  1857,  the  net  amount  of  customs  duty  received  in  the  port  of 
London  was  £11,495,322,  being,  in  round  figures,  about  half  of  the  whole 
amount  collected  within  the  United  Kingdom.  This  sum  was  made  up  of 
158,843  payments,  at  the  rate  of  514  in  number,  and  amounting  to  £37,210 
daily.  That  was  the  case  that  had  to  be  dealt  with.  The  treasury  adopted  two 
plans,  either  of  which  was  within  the  reach  of  all  traders  alike.  1.  The  one 
plan  provided  for  the  receipt  of  the  checks  of  private  traders,  drawn  upon  such 
bankers  as  would  comply  with  certain  regulations  made  with  a  view  to  the  secu 
rity  and  convenience  of  the  customs  department.  According  to  those  arrange 
ments,  a  check  being  presented  at  the  custom-house  in  payment  of  duties,  was 
received  by  the  proper  officer,  and  the  necessary  entries  for  the  ultimate  de 
livery  of  the  goods  were  proceeded  with ;  every  hour  a  clerk  was  despatched  with 
the  checks  which  had  been  received  within  the  hour  to  the  various  bankers 
upon  whom  they  were  drawn,  who  placed  their  mark  upon  them,  which  made 
them  payable  by  the  Bank  of  England,  where  they  were  charged  to  the  different 
bankers'  accounts.  The  clerk  then  returned  to  the  custom-house  with  the 


20  INTRODUCTION. 

this,  the  Exchequer  is  a  constant  borrower  from  the  people,  to  the 
extent  of  nearly  the  whole  annual  revenue  upon  Exchequer  bills.  It 
borrows,  in  anticipation  of  the  public  revenue,  from  those  who  lend 
voluntarily  upon  short  loans,  and  is  thus  enabled  to  disburse  the 
revenue  previous  to  its  receipt.  This  is  a  great  accommodation  to 
a  large  class  of  lenders,  who  are  pleased  to  have  an  opportunity  of 
realizing  interest  upon  short  loans,  and  upon  such  undoubted  secu 
rity  ;  this  class  are  thus  kept  in  constant  relations  with  the  govern 
ment,  and  are  prompt  to  supply  the  treasury  with  any  required 

checks  so  marked  ;  the  goods  were  cleared  and  delivered ;  and  the  whole  checks 
of  the  day  paid  to  the  public  account  at  the  Bank  of  England  at  the  close  of  the 
day,  where  they  were  adjusted  to  the  various  accounts  to  which  they  applied. 
By  this  means  a  merchant  had  the  check  system,  and  all  the  security  attaching 
to  it,  extended  to  the  payment  of  duties,  while  the  Crown  ran  no  risk.  2.  The 
other  plan  consisted  of  an  arrangement  with  the  Bank  of  England,  by  which  a 
special  description  of  bank-note  should  be  made  to  be  used  exclusively  for  cus 
toms  duties,  and  to  be  received  at  the  bank  only  from  the  customs  department. 
They  are  denominated  customs  checks.  The  different  bankers  receive  them 
from  the  Bank  of  England  as  they  do  their  own  notes ;  and  supply  their  cus 
tomers  with  them  as  they  are  required  for  the  specific  purpose  of  paying  duties. 
By  this  means  all  risk  of  theft  and  fraud  is  avoided.  To  all  intents,  they  are 
bank-notes,  but  to  be  used  only  for  a  specific  object,  and  useless  for  any 
other. 

"  The  utility  of  these  arrangements  is  now  seen  by  the  great  extent  to  which 
merchants  have  used  them.  In  the  last  year,  the  payments  of  customs  duties 
were  made  in  the  following  way :  — 

100,781  payments  in  cash £3r320,492 

35,317          "          by  traders'  checks 3,563,966 

22,745          "          by  customs  special  notes 4.610,864 


Total  payments...  158,843  Total  amount £11,495,322 

Therefore,  of  £11,495,322,  the  total  amount  of  payments,  only  £3,320,492  was 
made  in  cash  under  the  old  plan;  while  £8,174,799  was  made  in  the  two  new 
modes  of  checks  and  special  bank-notes.  And  even  those  payments  which  con 
tinue  to  be  made  in  cash,  consist  of  the  smallest  sums,  as  the  number  of  pay 
ments  made  in  this  way,  and  representing  the  smaller  sum  named,  is  no  less 
than  100,781  ;  while  the  number  representing  the  larger  sum  is  only  58,062. 
The  average  amount  of  the  payments  in  cash  is  £32  19s. ;  while  the  average  in 
traders'  checks  is  £101  3s.  4cf.,  and  in  special  bank-notes,  £204  Sa.  2d. 

"But  the  convenience  and  security  which  are  gained  by  the  merchant  by  this 
system,  great  as  they  are,  do  not  constitute  all  the  advantages  which  it  affords. 
It  effects  a  great  reduction  in  the  currency.  But  for  it,  the  sum  of  £8,174,799 
of  bank-notes,  issued  under  the  limit  of  the  act  of  1844,  would  have  been  re 
quired  in  1857  more  than  were  actually  used." 


INTRODUCTION.  21 

assistance  in  financial  emergencies.  The  creditors  of  the  public 
derive  even  more  advantage  from  this  mode  of  disbursement  in 
anticipation ;  for  the  Exchequer  being  always  ready  to  pay,  the 
whole  payments  of  the  annual  expenditure  are  made  not  only  with 
more  regularity,  but  probably  weeks,  if  not  months,  in  advance  of 
what  would  otherwise  be  the  time. 

The  present  financial  system  of  France,  the  result  of  a  reform 
which  has  been  in  progress  under  the  auspices  of  men  of  great  ability 
and  experience  for  more  than  thirty  years,  is  perhaps,  in  many 
aspects,  the  most  perfect  of  any  now  extant.  It  has  rescued  the 
finances  of  France  not  only  from  the  greatest  confusion  and  embar 
rassment,  but  has  placed  them  in  a  more  enviable  position  than 
those  of  any  country  in  Europe.  To  the  astonishment  of  the  capi 
talists  of  Europe,  the  government  of  France  was  able  to  borrow,  in 
1865,  for  the  expenditure  of  the  war  in  the  Crimea,  upwards  of 
$250,000,000,  without  resorting  to  the  city  of  Paris,  or  capitalists 
out  of  France.  Not  only  so,  but  the  sum  actually  offered  in  the  de 
partments  out  of  Paris  was  $332,000,000.  This  offer  to  the  govern 
ment  was  from  360,000  persons  in  the  interior  of  France,  very  few 
of  whom  would  have  been  lenders  to  the  public  but  for  the  very  ex 
cellent  financial  system  which  now  prevails  in  that  empire. 

In  Great  Britain  and  France,  large  use  is  made  of  treasury  notes, 
called,  in  the  one,  Exchequer  bills,  and  in  the  other,  Bons  du  Tresor. 
In  both  countries,  the  ministers  of  finance  are  permanently  author 
ized  to  issue  them  upon  certain  principles,  and  under  specific  regula 
tions.  In  England,  the  Exchequer  bills  are  issued  and  managed 
with  a  skill  and  success  which  nothing  of  the  kind  can  surpass.  In 
neither  country  has  there  been  an  over-issue  of  these  treasury  securi 
ties,  for  more  than  a  generation  past.  In  Prussia,  a  treasury  cur 
rency  in  denominations  as  low  as  five  dollars  has  been  issued,  for  that 
length  of  time,  and  no  abase  has  occurred.1  It  is  very  true,  that  the 
over-issues  of  the  assignats  during  the  French  Revolution,  of  the  con 
tinental  paper  currency  during  the  American  Revolution,  and  the 
later  over-issues  in  Russia  and  Austria,  are  well  calculated  to  create 
distrust  in  the  minds  of  all  whose  attention  is  turned  to  the  use  of  a 

1  The  Prussian  government  is  so  careful  of  the  credit  and  stability  of  this 
emission  of  currency  from  the  public  treasury,  that  it  redeems  promptly  every 
counterfeit  brought  to  the  public  offices.  By  this  -wise  policy,  it  obtains  the 
earliest  information  of  the  existence  of  counterfeits,  and  is  thus  able  promptly 
to  follow  offenders.  Of  course,  this  greatly  increases  confidence  in  the  currency. 


22  INTRODUCTION. 

paper  currency  for  public  purposes.  But  as  this  whole  matter  re 
solves  itself  into  questions  of  knowledge,  official  integrity,  and  finan 
cial  skill,  it  should  not  be  summarily  dismissed,  unless  it  is  conceded 
that  these  requisites  are  beyond  the  reach  of  our  government.  When 
we  remember  the  fact,  that  a  bank  can,  with  its  own  notes,  or  credits 
on  its  books,  purchase  commercial  paper  to  the  amount  of  millions 
of  dollars,  and  that  it  can  take  its  own  notes  and  issues  in  payment 
of  this  commercial  paper  as  it  matures,  thus  providing  a  special  cur 
rency  for  this  purpose,  and  saving  the  use  of  millions  of  money  — 
when  we  know  that  many  nations  could  pay  the  entire  national  ex 
penditure  in  treasury  notes,  and  that  they  could,  of  course,  afford  to 
take  such  notes  in  payment  of  all  dues  at  their  public  treasuries,  we 
should  hesitate  to  give  up  the  problem  of  a  government  currency  as 
impossible  to  solve. 

The  truth  is,  not  only  can  it  be  solved',  but  it  is  of  much  easier 
solution  than  many  others  which  constantly  engage  the  attention  of 
men  in  authority.  The  order,  subordination  and  numerous  checks 
which  now  characterize  our  treasury  department,  are  a  far  greater 
triumph  of  financial  skill  and  good  administration  than  would  be  the 
successful  employment  of  treasury  notes  as  a  currency.  Of  course, 
such  an  issue  by  the  treasury  could  only  be  upon  a  well-devised  plan, 
and  well-settled  principles,  to  be  as  faithfully  observed  as  are  the 
present  processes  of  the  many  functionaries  of  the  Treasury  Depart 
ment. 

The  leading  principle  of  every  such  emission  of  paper,  as  well  as 
that  of  the  banks,  is  to  issue  only  so  much  as  will  return  in  the  regu 
lar  course  of  the  business  in  which  the  issue  is  made.  It  is  not,  and 
(should  not  be,  the  issue  of  so  much  as  will  not  probably  be  returned 
for  payment,  but  the  issue  of  so  much  as  will  inevitably  return  in 
payment  to  the  issuer.  Whatever  amount  the  return  payments  to  the 
issuer  will  absorb,  is  a  safe  emission ;  beyond  that,  all  is  unsafe. 
The  Treasury  of  the  United  States  could,  in  any  year,  issue  one- 
fourth  the  amount  of  the  estimated  income  in  treasury  notes ;  the 
next  year,  one-half;  the  following  year,  three-fourths;  and  by  the 
experience  gained  in  three  years,  the  officers  entrusted  with  this  duty 
could  manage  such  emission  without  danger  of  over-issue.  If  the 
public  would  not  readily  receive  them,  they  should  not  be  issued  at 
all ;  if  they  should  fall  below  par,  immediate  measures  should  be 
taken,  at  any  cost,  to  recall  them  in  such  quantities  as  would 
restore  them  to  perfect  equality  with  gold. 


INTRODUCTION.  23 

The  suggestions  made  in  the  chapter  on  public  payments  are 
chiefly  intended  to  stimulate  inquiry,  and  secure  the  attention  of  men 
whose  experience  in  financial  affairs,  and  general  knowledge  of  busi 
ness,  may  enable  them  to  throw  some  light  on  the  interesting  ques 
tions  involved  in  the  whole  subject. 

Although  it  has  not  been  our  design  to  propose  reforms,  or  even 
to  give  intimations  of  that  kind,  we  cannot  forbear  introducing  here 
a  further  remark  on  the  subject  of  bank  deposits.  In  our  large  cities 
these  are  of  great  amount,  and  upon  their  management  depends  very 
largely  the  state  of  the  currency  throughout  the  whole  country.  If 
city  banks  are  constrained  at  any  time,  by  a  demand  for  the  precious 
metals,  to  contract  their  issues,  and  to  withhold  the  customary  facili 
ties  of  banking  by  refusing  to  discount  commercial  securities,  the  con 
traction  of  currency  which  ensues  becomes  an  occasion  of  loss  and 
damage  often  tenfold  greater  than  the  amount  of  specie  involved  in 
the  demand.  A  contraction  of  currency  by  the  banks  in  New  York 
soon  extends  its  baleful  influences  throughout  the  whole  land.  The  mis 
chief  becomes  vastly  disproportioned  to  its  cause.  It  is  in  view  of  the 
magnitude  of  this  evil,  and  of  its  frequent  and  inevitable  occurrence, 
that  we  make  a  suggestion,  dictated  more  by  a  desire  to  save  the 
community  from  harm,  than  to  save  the  banks  from  any  liability  for 
specie  to  which  they  are  justly  exposed.  The  banks  should  be  even 
more  desirous  to  prevent  these  evils  than  to  protect  their  reserve  of 
coins  and  bullion. 

The  danger  of  the  city  banks,  which  drives  them  to  the  measure  of 
contracting  the  currency  as  a  defence,  arises  mainly  from  liability  to 
pay  their  deposits  on  demand  in  specie.  Now,  however  great  may  \ 
be  the  difficulty  of  changing  our  present  banking  system,  so  far  as 
bank-notes  are  concerned,  it  does  not  extend  to  deposits.  These  be 
long  to  the  customers  of  the  banks,  residing  for  the  most  part  in  their 
vicinity,  whose  chief  business  with  the  banks  is,  through  them,  to 
apply  their  credits  to  the  payment  of  their  debts.  This  is  mainly  done 
by  the  proceeds  of  discounted  notes,  with  an  average  of  more  than 
two  months  to  run.  The  banks  may  propose  to  this  large  class,  that 
the  proceeds  of  discounts  shall  only  be  entered  to  their  credit,  pay 
able  in  legal  currency  when  the  discounted  paper  matures,  but  receiv-  I 
able  as  now  at  all  the  banks  for  every  debt  payable  there.  This  j 
would  ensure  the  deposits,  for  every  legitimate  purpose  to  which  they 
are  applicable,  ample  circulation ;  indeed,  they  would  be  no  less  cur 
rent  and  acceptable  than  they  are  at  present.  They  could,  with  equal 


24  INTRODUCTION. 

effectiveness,  fill  every  proper  function  to  which  they  are  adapted. 
They  would  cease  to  be  an  object  of  overwhelming  alarm  whenever  a 
demand  for  the  precious  metals  occurred  ;  the  banks  could,  therefore, 
in  the  face  of  such  a  demand,  continue  their  discounts,  and  supply 
the  usual  facilities  of  payment,  knowing  that  the  constant  progress 
of  payments  to  them  would  absorb  all  these  issues  of  credit  before 
specie  could  be  demanded  for  them. 

Some  modification  of  this  plan  might  certainly  be  arranged  by  men 
with  clear  views  of  the  subject,  and  sufficient  experience  in  banking ; 
the  effect  of  which  would  be  to  place  the  city  banks  upon  a  safer  basis 
than  they  have  ever  yet  rested  on,  and. to  take  away  from  them  all  pre 
text  for  those  sudden  contractions  of  currency,  which,  whilst  they 
are  a  scourge  to  industry  and  trade,  make  the  banks  themselves 
constant  objects  of  reproach  and  detestation  to  a  large  class  of  the 
community. 

There  is  nothing  in  the  law  of  legal  tender  to  prevent  this.  The 
banks  now  agree  to  pay  the  proceeds  of  discounted  notes  on  de 
mand,  and  of  course  that  law  places  them  under  the  obligation  of 
paying  in  gold  or  silver.  But  on  the  plan  proposed,  the  banks  would 
only  agree  to  pay  the  proceeds  at  maturity  of  the  discounted  paper, 
with  the  additional  stipulation  that  these  credits  would  be  receivable 
in  all  payments  to  the  banks.  Under  such  an  arrangement  the  banks 
would,  at  all  ordinary  times,  treat  these  deposits  precisely  as  they  do 
now  ;  but  in  case  of  a  demand  for  specie  for  exportation,  they  could 
choose  between  contracting  the  currency  and  refusing  to  pay  specie, 
except  under  the  terms  of  their  contract  with  their  depositors.1 

The  order  in  which  we  have  presented  the  subjects  of  this  volume 
seems  to  us  the  logical  one ;  but  we  have  no  doubt  there  are  many 
who  will  be  more  inclined  to  look  first  at  what  is  advanced  on  the 
subject  of  the  credit  system.  This  will  naturally  be  the  case  with 
those  who  are  already  familiar  with  the  subject.  All  such  may  com 
mence  their  examination  at  the  seventh  chapter,  turning  to  the  pre 
vious  chapters  only  as  they  may  find  occasion,  from  the  tenor  of  the 
matters  discussed. 

1  A  memorandum  somewhat  in  this  form  might  be  prefixed  to  each  bank  book: 
"  The  proceeds  of  all  notes  discounted  for  C.  D.  shall  be  placed  to  his  credit, 

payable  in  gold  or  silver  to  the  said  C.  D.  at  the  maturity  of  the  notes  discounted ; 

but  subject,  in  whole  or  in  part,  to  the  check  of  C.  D.  in  payment  of  any  debt 

due  to  the  bank,  or  for  the  purpose  of  transferring  the  same  to  any  other  bank 

or  person." 


THE 


WAYS  AND  MEANS  OF  PAYMENT, 


CHAPTER   I. 

Exchange  of  commodities  an  incident  of  civilized  life  —  The  agencies  by 
which  this  exchange  is  effected  must  not  be  confounded  with  the  exchange 
itself —  Tlie  fitness  and  use  of  these  agencies  can  be  best  determined  by 
treating  them  as  agencies  more  or  less  necessary  to  the  main  purpose  — 
Money,  and  money  of  account. 

IN  civilized  life  the  industry  of  men  is  so  largely  developed 
and  subdivided,  as  to  involve  an  incessant  exchange  of  commodi 
ties  and  services.  Civilized  men  require  food  and  clothing  of 
great  variety  in  form,  substance  and  preparation.  Their  dwell 
ings  and  furniture  are  equally  varied,  and  demand  for  their  pro 
duction  an  equally  varied  and  subdivided  industry.  Intellectual, 
moral  and  religious  wants  and  exigencies  engage  also  a  large  force 
of  subdivided  labor.  In  this  division  of  labor,  there  is  one  large 
class  employed  in  producing  and  preparing  food ;  another  in 
producing  and  preparing  raiment ;  another  in  building ;  another 
in  furnishing  buildings ;  and  another  in  the  labor  of  minister 
ing  to  intellectual,  civil,  moral  and  religious  wants :  each  of 
these  large  divisions  is  again  subdivided  into  lesser  classes ;  and 
these  again  by  innumerable  ramifications  and  divisions,  until 
each  person  is  reached  in  his  separate  individuality.  The  whole 
labor  of  society  is  thus  apportioned  among  all  its  members  in 
that  way  which  the  force  of  circumstances,  and  their  intelligence, 
has  dictated.  In  every  community,  much  the  larger  number  of 
persons  are  mere  laborers,  and  have  only  their  labor  to  give  in 


26  EXCHANGE     OF    COMMODITIES. 

exchange  for  such  of  the  comforts  of  life  as  they  may  require. 
In  every  case,  however,  whether  we  regard  classes  or  individuals, 
a  continual  series  of  exchanges  is  involved.  The  manufacturers 
of  clothing  must  have  food,  shelter  and  furniture ;  the  producers 
of  food  must  have  clothing,  shelter  and  furniture ;  the  builders 
and  furnishers  of  houses  must  have  food  and  clothing ;  those 
who  minister  to  intellectual,  civil,  moral  and  religious  wants, 
need  all  those  things ;  and  the  others,  in  like  manner,  require 
their  services.  Descending  to  every  individual  of  each  class, 
each  person  must  give  his  labor,  the  product  of  his  labor,  or  the 
products  of  the  labor  of  others,  in  order,  with  that,  to  purchase 
what  he  requires.  Every  individual  who  earns  a  living,  whether 
by  his  own  labor  or  that  of  others,  must  exchange  what  he  has 
for  that  which  he  wants.  Even  merchants,  whose  chief  business 
it  is  to  assist  in  this  great  interchange  of  commodities,  exchange, 
by  a  continued  process,  their  old  stock  of  goods  for  a  new  one. 
The  progress  of  industry  and  society  is  thus  mainly  character 
ized  by  a  constant  series  of  exchanges,  in  which  every  individual 
takes,  directly  or  indirectly,  an  interested  part.  The  manufac 
turer  who  produces,  by  the  labor  of  others,  goods  to  the  value 
of  half  a  million  yearly,  exchanges  these  goods  for  the  raw  mate 
rials  and  labor  which  enable  him,  in  a  succeeding  year,  to  pro 
duce  a  like  amount.  The  professional  man,  the  artist,  or  the 
laborer,  exchange  the  exercise  of  their  learning,  skill  or  labor  for 
what  they  want,  consume  or  enjoy. 

The  reader  may  develop  more  fully,  and  dwell  upon  these 
great  features  of  industry  and  civilization,  viewing  them  thus 
apart  from  the  mere  agencies  by  which  this  vast  interchange  is 
effected.  It  is  not  difficult  to  distinguish  between  the  thing  to 
be  done,  between  the  exchange  thus  accomplished,  and  the  means 
by  which  it  is  done.  One  large  and  important  class  of  society 
is  composed  of  the  various  agents  engaged  in  the  process  of  this 
interchange  as  their  business  or  profession:  merchants,  with 
their  attendants,  bankers,  brokers,  clerks,  transporters,  and  the 
laborers  connected  with  them,  constitute  that  class  in  every 
country.  But  other  agencies  are  also  prominent,  such  as  ships, 
boats,  canals,  railways,  warehouses,  shops,  books  of  account,  and 


EXCHANGE    OF    COMMODITIES.  27 

money.  None  of  these  are  essential  to  the  idea  of  an  exchange. 
They  are  facilities,  agencies,  aids  more  or  less  desirable  or  indis 
pensable,  according  to  circumstances.  Men  who  are  near  to  each 
other  may  effect  their  exchanges  without  the  aid  of  merchant, 
broker,  ship  or  carriage.  They  may,  by  means  of  books  of 
account  and  mutual  charges  and  credits,  wholly  dispense  with 
money.  The  intervention  of  money  has,  in  no  small  degree, 
blinded  men  to  the  distinction  between  the  exchanges  of  indus 
trial  life  and  the  means  or  agencies  by  which  they  are  accom 
plished.  This  agency  of  money,  although  one  of  the  most 
important,  and  doubtless  one  of  the  oldest  and  most  expensive, 
is,  however,  very  far  from  being  an  indispensable  concomitant  of 
an  exchange  of  other  commodities.  The  advantage  of  a  common 
medium  of  real  value,  for  which  men  could  safely  sell  any  com 
modity  they  had,  and  with  it  as  readily  purchase  any  they 
required,  cannot  easily  be  over-stated.  Money,  however,  is  not 
of  the  essence  of  an  exchange,  but  only  an  agent  to  be  employed 
when  some  advantage  is  to  be  gained  by  resorting  to  it,  of  faci 
lity,  security  or  otherwise.  When  a  man  sells  an  hundred  bushels 
of  wheat  for  $150,  and  with  that  money  purchases  three  tons  of 
iron,  the  transaction  is  an  exchange  of  the  wheat  for  the  iron. 
The  money  employed  is  as  much  an  agent,  as  the  wagon  used 
to  transport  the  wheat  and  the  iron.  The  exchange  could  have 
been  made  without  it,  but  it  was  used  because  the  parties  found 
it  more  convenient  or  advantageous  to  do  so.  Even  when 
money  is  employed,  its  real  value  as  an  equivalent  is  not  an 
essential  ingredient  of  the  exchange.  If,  unknown  to  one  or  both 
parties,  the  money  employed  is  counterfeit  and  worthless,  the 
exchange  of  the  wheat  for  the  iron  is  none  the  less  perfect  and 
satisfactory  to  all  parties ;  and  the  counterfeit  money  may  con 
tinue  to  circulate,  and  be  the  medium  or  agent  in  many  such 
exchanges,  before  it  is  discovered.1  All  these  exchanges  will  be 
as  perfect  as  if  effected  with  good  money.  This  does  not  prove 
that  when  money  is  used  as  equivalent,  it  should  not  be  really 

1 A  counterfeit  dollar  may  be  the  agent  of  a  hundred  exchanges,  and  only 
the  value  of  the  dollar  be  lost  by  one  person,  in  whose  hands  it  is  detected. 
A  large  quantity  of  false  money  is  always  in  circulation*. 


28  EXCHANGE    OF    COMMODITIES. 

what  it  purports  to  be ;  it  only  shows  that  exchanges  of  commo 
dities  may  be  effected  without  a  real  equivalent  as  a  medium. 
Wheat,  in  the  case  above,  pays  for  the  iron ;  the  commodities 
exchanged  are  the  compensation,  or  payment,  for  each  other. 
Thus,  in  the  course  of  the  year,  a  man  exchanges  the  commodi 
ties  he  makes,  or  has  for  sale,  for  those  which  he  requires ;  that 
is  the  main  feature  and  object  of  his  business.  The  professional 
man,  and  he  who  ministers  to  intellectual,  civil,  moral  and  reli 
gious  wants,  exchanges  his  services  for  that  which  he  consumes 
or  requires.  These  multifarious  exchanges  are  effected  with  or 
without  money,  or  other  ordinary  agency  of  exchanges;  their 
beneficial  results  do  not  depend  upon  the  manner  in  which  they 
are  effected.  The  exchange  of  the  commodities  being  the  object, 
every  advantage,  facility,  security  and  economy  would  be  resorted 
to  in  accomplishing  that  object. 

We  thus  insist  upon  keeping  the  object,  and  the  means  or 
agencies  of  effecting  it,  separate  and  distinct,  as  necessary  to 
attaining  clear  views  of  the  whole  subject.  As  economy,  facility 
and  security  are  to  be  consulted  in  the  thing  to  be  done,  it  is 
necessary  to  keep  the  agencies,  in  all  cases,  in  a  subservient 
position,  to  be  employed  or  not,  to  be  changed  and  modified  or 
not,  exactly  as  the  main  object  dictates. 

Although  our  design,  at  present,  is  to  treat  of  only  one  class 
of  the  agencies  in  effecting  this  great  interchange  of  commodities 
and  services,  that  which  relates  to  commercial  payments,  in 
cluding  money  and  all  its  substitutes  and  modifications,  we  hold 
it  to  be  specially  important  to  a  true  comprehension  of  the  sub 
ject  that  the  agent,  whatever  it  maybe,  should  always  be  treated 
as  subordinate  to  the  object  which  is  accomplished  by  it.  Money, 
in  all  its  forms  and  modifications,  is  to  be  employed  or  not,  and 
to  a  greater  or  lesser  amount,  as  circumstances,  commercial  skill 
and  convenience  require ;  always  considering,  first,  the  ex 
changes  to  bo  effected,  and  next,  the  means  of  effecting  them. 
This  is  the  channel  which  men  pursue  in  the  actual  progress  of 
business,  and  it  is  that  which  will  conduct  us,  with  proper  dis 
crimination,  to  the  clearest  views  of  the  .subject. 

But  another  distinction  is  equally  to  be  marked  and  kept  up 


EXCHANGE    OF    COMMODITIES.  29 

in  the  mind  by  those  who  \vould  attain  to  clear  conceptions  on 
the  subject  of  money.  We  refer  to  the  distinction  between  the 
precious  metals,  as  a  common  equivalent,  and  coins  from  a  public 
mint.  It  should  be  understood  that  it  is  not  coinage  which  con 
verts  the  precious  metals  into  money.  They  would  be  used  as 
such  were  there  no  coins,  as  is  the  case  in  China.  Coinage  does 
not  give  the  precious  metals  a  value  which  they  had  not  before. 
It  is  not  in  the  power  of  any  nation  to  regulate  the  price  of  gold 
or  silver ;  this  price  must  depend  on  circumstances  which  no 
nation  can  control.  But  though  coinage  is  not  that  which  gives 
their  value  or  price  to  gold  or  silver,  it  is  that  which  prepares  it 
properly  for  the  purposes  of  a  medium  of  exchange.  In  all  the 
large  payments  in  which  gold  is  now  employed,  it  would  be  used 
in  the  shape  of  bars,  if  not  in  that  of  coins.  In  the  case  of  such 
payments,  the  mint  needs  only  to  prepare  bars  of  fine  gold  or 
silver,  of  some  uniform  standard  or  quality,  in  order  that,  in 
paying,  only  the  weight  would  have  to  be  verified  or  ascertained. 
Gold  and  silver  may  then  answer  all  the  purposes  of  money, 
without  being  coined;  for  retail  purposes,  and  small  payments, 
the  coinage  affords  a  facility  or  convenience  which  is  fully  appre 
ciated  and  admitted  on  all  hands.  But  the  coins,  as  such,  do 
not  constitute  the  money.  'The  coins  have  a  uniform  shape, 
weight  and  quality,  or  standard,  and  in  this  consists  their  charac 
ter.  Prices  are  not  expressed  in  coins  ;  that  is,  coins  are  not 
exhibited  to  express,  signify  or  mark  the  price  of  any  commo 
dity.  There  is  a  mode  of  expressing  prices  or  amounts,  which 
is  perfectly  intelligible,  in  which  coins  are  not  employed. 

The  sums  written  in  books  of  account,  and  upon  the  face  of 
promissory  notes  and  bills  of  exchange,  are  not  indebted  for  their 
definite  meaning  to  coins  or  coinage.  Previous  to  our  adoption  of 
the  dollar  as  the  unit  of  our  money  of  account,  all  prices  were 
expressed,  and  books  were  kept,  in  pounds,  shillings  and  pence, 
which  had  no  corresponding  coin;  so,  also,  were  promissory 
notes  and  money  securities  expressed.  Thes%  denominations 
were  the  money  of  account  of  that  day,  as  the  dollar  is  at  pre 
sent.  It  is  well  known,  as  we  shall  remark  more  fully  hereafter, 
that  these  terms  had  a  different  significance  in  Massachusetts, 


30  EXCHANGE    OF    COMMODITIES. 

New  York  and  Pennsylvania.  In  each  of  these  the  unit  had  a 
different  value  or  power,  which  was  perfectly  understood  by  the 
people  in  those  different  States  ;  although  in  neither  was  there, 
or  had  there  ever  been,  any  coin  corresponding  with  these  various 
units.  Men  can  carry  in  their  minds  a  unit  of  value,  as  they 
can  carry  the  idea  of  a  foot,  a  yard,  a  mile,  or  an  acre ;  or  of  a 
pound,  an  ounce,  or  pennyweight.  The  physician  writes  his 
prescription  in  ounces,  drachms  and  scruples,  in  matters  requir 
ing  the  utmost  accuracy,  and  involving  life  or  death.  He  has, 
of  course,  in  his  mind  the  most  definite  and  accurate  idea  of  the 
quantities  of  the  various  ingredients  to  be  compounded.  But 
when  the  prescription  comes  to  be  made  up,  the  apothecary 
must  apply  the  measure  or  the  scales,  or  he  cannot  accurately 
realize  the  idea  of  the  physician.  It  is  the  same  with  the  money 
of  account.  It  is  so  universally  in  use,  that  everybody  is  as 
familiar  with  its  meaning  as  the  physician  is  with  the  apothe 
caries'  weight.  All  prices,  and  all  amounts,  are  expressed  in  it; 
but  when  a  payment  is  to  be  made  in  gold  or  silver,  the  scales 
must  be  applied,  or  coin  produced,  of  which  the  value  as  ex 
pressed  in  the  money  of  account  is  known. 

Money  of  account  will  be  the  subject  of  special  treatment  in 
the  following  chapter. 


CHAPTER    II. 

I  1.     People  employing  gold  and  silver  have  terms  in  which  to  express  their 
value  —  Mint  price  and  market  price  —  Money  of  account  a  necessity. 

BEFORE  treating  specially  of  the  use  of  gold  and  silver  as 
money,  it  will  be  of  advantage  to  notice  and  understand  the  mode 
of  expressing  prices,  keeping  accounts,  and  stating  amounts, 
which  has  prevailed  among  all  civilized  people,  arid  still  prevails. 
People  who  have  attained  to  the  use  of  weights  and  mea 
sures,  and  arithmetic,  employ  a  money  of  account,  in  which  they 
state  prices,  sums  and  accounts.  It  is  not  a  mechanical  process 
by  which  other  articles  are  compared  by  weight  or  bulk  with  gold 
or  silver.  It  is  an  arithmetical  process,  by  which,  with  the  aid 
of  some  unit  of  value,  taking  its  origin  from  a  coin  or  special 
weight  of  gold  or  silver,  the  value  of  such  coin  or  weight 
being  fixed  in  the  mind  by  constant  use  for  a  time,  becomes  a 
unit,  readily  borne  in  the  mind,  susceptible  of  being  readily 
added,  multiplied  or  divided  by  a  combination  with  numerals. 
There  is  no  nation  far  enough  advanced  to  employ  arithmetic 
which  does  not  attach  a  specific  value  to  both  gold  and  silver, 
and  which  has  not  some  terms  in  which  to  express  that  value. 
In  the  first  stage  of  using  the  precious  metals  as  a  medium  of 
exchange,  they  are  given  in  exchange  for  commodities  according 
to  the  estimate  the  parties  to  the  exchange  make  at  the  time. 
With  the  progress  of  intelligence  and  arithmetic,  people  begin 
to  place  a  general  price  on  the  precious  metals,  as  well  as  upon 
other  things.  Every  article  which  is  the  subject  of  exchange, 
becomes  the  subject  of  price,  and  by  help  of  these  prices  the 
parties  make  their  sales  and  payments.  The  price  or  value  of 
gold  or  silver  ceases  to  be  what  the  party  possessing  them,  at  his 
caprice,  puts  upon  them;  their  price  becomes  even  better  known, 

(31) 


32  MONEY    OF    ACCOUNT. 

generally,  than  that  of  any  other  articles  ;  and  it  is  by  this  price 
that  they  are  paid  or  delivered.  This  fact  is  obscured  and  hid 
den  from  popular  view  by  the  custom  of  governments  fixing  a 
price  upon  the  precious  metals  for  the  purposes  of  coinage.  It 
is  thus  overlooked  too  often,  that  the  price  at  the  mint  is  founded 
on  the  market  price ;  the  people  at  large  having  no  occasion  to 
discuss  the  prices  of  gold  and  silver  as  they  do  of  other  articles, 
the  impression  prevails  that  the  price  of  gold  and  silver  is  merely 
an  affair  of  the  mint  and  public  authority.  It  is  important,  how 
ever,  and  should  not  be  forgotten,  that  gold  and  silver  are  just 
as  much  the  subject  of  price  as  other  things,  though  obscured  by 
coinage  and  legal  enactments.  This  is  familiarly  known  to 
dealers  in  coins  and  bullion,  and  to  intelligent  merchants  and 
bankers  ;  though  all  such  are  not  equally  aware  how  much 
they  are  indebted  to  the  money  of  account  for  the  facility  with 
which  they  make  their  varied  computations,  and  varied  transac 
tions,  without  any  aid  from  coins. 

The  formation  of  a  money  of  account  among  people  capable 
of  employing  one,  is  not  only  an  universal  mental  proclivity,  it 
is  a  mercantile  necessity.  It  would  be  literally  impossible,  in  the 
present  state  of  coinage,  to  continue  for  any  considerable  time 
to  express  prices  and  large  sums  by  the  number  of  coins  which 
would  be  equivalent  to  the  price  or  amount.  The  same  effort  of 
mind  necessary  to  remember  the  value  of  a  coin  thus  named 
to  express  a  price  or  an  amount,  is  sufficient  to  enable  persons 
to  carry  the  memory  of  that  value  in  the  mind,  and  use  it  with 
the  same  effect,  abstractly,  as  if  referring  to  the  coin.  Every 
coin  or  weight,  of  gold  or  silver,  used  for  any  long  period  as 
the  means  of  expressing  prices  or  amounts,  becomes  the  unit  of 
a  money  of  account,  and  is  used  abstractly  and  arithmetically. 
It  becomes  quite  as  capable  of  expressing  changes  in  the  value 
of  the  precious  metals,  as  of  any  other  articles ;  for  it  remains 
fixed  at  the  value  at  which  it  passed  into  the  money  of  account. 
It  is  then  employed  in  expressing  the  prices  of  thousands  of 
articles,  and  for  stating  all  possible  sums  in  the  way  of  compu 
tations,  accounts  and  financial  adjustments.  Being  so  variously 
and  constantly  employed  by  such  multitudes,  it  attains  perina- 


MONEY    OF    ACCOUNT.  33 

nency ;  being,  like  the  mast  of  a  ship,  held  by  stays  and  checks 
innumerable  on  every  side. 

The  value  of  the  unit,  or  beginning  point,  being  once  firmly 
fixed  in  men's  minds  by  constant  use,  remains  there  wholly  inde 
pendent  of  subsequent  changes  of  price  "which  may  affect  the 
specific  article  from  which  it  took  its  rise.  Thus,  if  it  sprung 
from  a  coin,  or  a  certain  quantity  of  gold  or  silver,  it  becomes 
afterwards  so  independent  of  these  as  to  be  quite  capable  of  ex 
pressing  the  changing  prices  of  that  or  any  other  coin.  It  is, 
then,  a  matter  of  fact  that  all  commercial  people  keep  their 
accounts,  compute  money,  and  express  prices,  by  the  use  of  a 
money  of  account.  The  naming  a  price  with  them  is  not  naming 
a  coin,  or  any  specific  quantity  of  gold  or  silver ;  but  it  is  the 
employment  of  the  denominations  of  the  money  of  account,  which 
all  understand  to  express  a  price.  There  is  scarcely  any  mental 
operation  more  generally  and  constantly  in  exercise,  than  that 
which  is  used  to  fix  and  express  prices.  All  classes  of  men  have 
more  or  less  occasion  to  be  familiar  with  it. 

The  distinction  between  money  and  money  of  account  is  not 
apprehended  and  kept  before  the  mind  with  equal  facility,  by  all 
persons,  on  the  first  attempt.  If  the  subject  is  new  to  the  party 
making  the  effort,  it  will  require  some  earnest  attention  and 
patient  discrimination.  Moliere,  in  one  of  his  comedies,  intro 
duces  a  character  who,  entering  upon  the  education  suitable  for 
a  gentleman  late  in  life,  finds,  to  his  great  surprise  and  pleasure, 
that  he  had  been  speaking  prose  all  his  life  without  a  master. 
So  many  have  to  learn  that  they  have  been  long  employing  a 
money  of  account,  without  being  aware  of  the  acquisition  they 
had  made.  Even  in  those  times  and  countries  where  money  cir 
culated  by  weight,  or  in  uncoined  pieces,  there  must  have  been 
some  mode  of  expressing  the  value  of  silver  by  weight,  or  of 
the  "pieces"  which  were  cut  to  a  particular  weight,  and  passed 
as  "  pieces  of  silver."  Whether  bar,  piece  or  shekel,  the  parties 
dealing  had  some  way  of  expressing  the  value  of  the  precious 
metals.  A  people  who  have  arrived  at  such  a  degree  of  civiliza 
tion  as  to  receive  and  'deliver  gold  and  silver  by  weight,  and  to 
employ  arithmetic  in  the  computations  connected  with  such  trans- 
3 


34  MONEY    OF    ACCOUNT. 

actions,  must  be  supposed,  as  we  have  said,  to  have  some  idea 
of  the  value  of  the  various  quantities  of  gold  or  silver  which  the 
scales  and  weights  might  specify.  If  a  piece  of  gold  were  cut 
from  a  bar,  and  found  to  be  of  a  particular  weight,  they  attached 
a  particular  value  to  so  much  gold.  They  did  not  merely  say  a 
shekel  gold  is  worth  a  shekel  of  gold,  but  they  attached  a  price 
to  so  much  gold  as  weighed  a  shekel ;  and  they  had  some  terms 
in  which  to  express  it.  If  one  said  to  another,  I  will  give  you  a 
shekel  of  silver  for  an  article,  the  party  addressed  had  two  men 
tal  processes  to  go  through  before  he  could  understand  the  offer ; 
he  had  to  recall  to  mind  how  much  gold  was  the  weight  of  a 
shekel,  and  next,  what  was  the  value  of  that  much  gold.  One 
of  these  processes  involved  an  abstract  quantity,  and  the  other 
an  abstract  value.  So  easily  does  the  mind  master  these  abstrac 
tions,  that  men  retain  the  ideas  of  weights  and  values  in  their 
minds  as  readily  as  they  do  the  power  or  significance  of  numbers. 
Values  and  quantities  have,  from  the  very  dawn  of  civilization, 
been  as  readily  retained  as  any  of  the  processes  of  arithmetic, 
and  they  are  now  as  familiar  as  the  multiplication  table. 

If  we  suppose  the  pieces  of  silver  mentioned  in  the  New  Tes 
tament  were  of  unequal  and  undetermined  weight,  we  may  imagine 
them  to  have  been  offered  for  what  they  might  happen  to  be 
worth ;  as  if  the  party  offering  should  say,  here  are  thirty  pieces 
of  silver :  you  see  them :  will  you  take  them  for  the  service  we 
ask  ?  In  such  an  offer,  no  money  of  account  would  be  employed. 
It  would  be  an  offer  of  a  quantity  of  silver  to  be  judged  of  by 
sight.  But  if  the  thirty  pieces  of  silver  were  coins,  or  quantities 
known  and  familiar  by  constant  use,  their  value  or  price  would 
occur  to  the  mind  the  moment  they  were  recognized ;  and  in 
every  civilized  country  there  is,  and  always  has  been,  a  mode  of 
expressing  and  writing  down  the  value,  which  is  thus  readily  per 
ceived  and  understood ;  and  this  is  the  money  of  account.  If 
one  person  say  to  another,  I  will  give  you  these  100  Spanish 
dollars  now  before  me  for  your  horse,  money  of  account  is  not 
necessarily  involved ;  it  is  the  specific  offer  of  the  100  silver 
coins  for  the  horse.  Yet,  if  the  party  to  whom  the  offer  is  made 
makes  any  valuation  of  the  100  Spanish  dollars,  he  can  only  do 


MONEY    OF    ACCOUNT.  35 

it  by  means  of  a  money  of  account.  If  the  offer  is  merely  of  100 
dollars  for  the  horse,  the  value  or  price  is  expressed  in  money 
of  account ;  the  payment  is  to  be  arranged  afterwards,  either 
by  a  promissory  note,  or  bank-notes,  or  five  $20  gold  pieces,  or 
twenty  §5  gold  pieces,  or  200  half  dollars.  So  if,  in  the  United 
States,  one  person  says  to  another,  "  I  will  give  you  these  50 
British  sovereigns,  or  these  50  French  Napoleons,  or  these  100 
five  franc  pieces,  for  any  commodity,"  it  would  be  understood 
to  be  the  offer  of  a  specific  article :  it  would  be  regarded,  not  as 
an  offer  of  money,  but  of  the  particular  coins  mentioned,  whether 
worth  more  or  less.  The  party  accepting  such  an  offer  would 
accept  the  thing  offered.  But  an  offer  of  100  dollars,  only  im 
plies  that  the  payment  is  to  be  satisfactory,  and  if  not,  the  person 
to  whom  payment  is  to  be  made  has  the  power  of  exacting  it  in 
such  coins  as  the  laws  have  made  a  legal  tender. 

\  2.  Idea,  of  value  carried  in  the  mind  as  the  idea  of  weights,  measures  of 
length  and  capacity  —  The  use  of  a  money  is  much  greater  than  of  money 
—  Often  confused  in  language  —  Kelly's  Cambist  quoted  —  Varieties  of 
moneys  of  account  —  British  decimal  system. 

The  idea  of  a  certain  value,  which  of  course  had  its  origin 
in  an  actual  comparison,  or  perfect  familiarity,  with  some 
material  article,  is  as  easy  to  fix  and  carry  in  the  mind  as  the 
idea  of  weight  or  quantity.  As  physicians  carry  in  their  minds, 
with  perfect  certainty  and  facility,  the  idea  of  the  weights  and 
quantities  involved  in  ounces,  scruples  and  drachms,  and  pre 
scribe  compounds  of  medicines  requiring  the  utmost  nicety  and 
caution,  by  their  knowledge  of  these  quantities,  without  scales  or 
weights :  so  it  is  with  pounds,  tons,  bushels,  yards,  feet  and 
inches ;  these  terms  carry  to  the  minds  of  those  most  familiar 
with  them,  perfectly  definite  ideas,  independent  of  any  actual 
use  of  weights  and  measures.  They  use  them  constantly,  well 
understanding  each  other  in  reference  to  quantities,  not  only 
without  the  weights  and  measures,  but  without  any  access  to 
them.  So  men  speak  of  values  and  prices,  perfectly  comprehend 
ing  each  other,  although  they  may  have  no  means,  nor  any  occa 
sion  for  payment. 


36  MONEY    OF    ACCOUNT. 

It  is  as  easy  to  carry  the  idea  of  the  value  expressed  by  a 
pound  sterling,  a  franc,  or  a  dollar,  in  the  mind,  as  the  quantity 
expressed  by  a  ton,  a  pound,  a  bushel,  or  a  foot.  The  truth  is, 
that  there  is  so  much  occasion  to  name  prices,  or  express  values, 
that  almost  every  individual  of  a  community,  however  insignifi 
cant  he  may  be,  becomes  perfectly  familiar  with  the  money  of 
account.  It  is  more  used  than  any  reference  to  weights  and 
measures.  After  all,  none  of  these  ideas  cost  the  mind  more 
effort  than  that  of  carrying  the  value  or  power  of  the  Arabic 
numerals.  It  is  no  greater  effort  of  mind  to  understand  what 
is  meant  by  ninety-nine  bushels,  than  to  understand  what  is 
intended  by  ninety-nine  men.  Quantities  and  values  can  be 
made  the  subject  of  conversation,  of  estimate,  of  contracts,  of 
statistical  tables,  and  of  innumerable  modes  of  expression,  without 
any  production  of  the  article  spoken  of,  or  of  the  weights,  scales, 
measures  or  coins  by  which  quantities  are  actually  defined,  or 
payments  actually  made.  It  is  well  it  is  so,  for  it  would  be  very 
inconvenient  to  produce  a  pound  weight,  or  a  dollar  in  coin,  to 
explain  our  meaning  when  a  pound  or  dollar  is  mentioned,  not  to 
speak  of  tons  and  miles. 

The  value  of  the  unit  of  a  money  of  account  is,  in  fact,  so  fas 
tened  on  men's  minds,  that  it  may  be  said  there  is  nothing  they 
knowT  better,  and  nothing,  so  far  as  their  mental  habits  are  con 
cerned,  which  is  so  little  likely  to  change.  If  no  attack  were 
made  upon  this  mental  habit  in  Great  Britain,  the  people  of  that 
country  would  continue  to  keep  accounts,  compute  and  express 
prices,  in  pounds,  shillings  and  pence  for  ages  to  come,  even  if 
no  sovereigns,  or  pounds  or  shillings,  were  known  among  their 
coins.  Though  flooded  with  all  the  coins  of  the  world,  they 
would  promptly  and  readily  express  the  value  of  every  coin 
in  pounds,  shillings  and  pence.  It  is  the  money  of  account 
of  England  which  at  this  moment  performs  the  great  function  of 
expressing  all  prices  there,  whether  of  stocks,  or  coins,  or  bullion, 
or  bank-notes,  or  merchandize.  It  is  not  the  gold  sovereign, 
nor  the  silver  shilling,  nor  the  copper  penny,  which  is  used  to 
measure  the  values  of  these  innumerable  things ;  it  is  the  scale 
of  the  money  of  account  existing  in  all  men's  minds,  and  appli- 


MONEY    OF    ACCOUNT.  37 

cable  to  every  article  alike,  which  is  employed  to  express  every 
possible  price  and  variation  of  price. 

So,  in  the  United  States,  our  money  of  account,  the  dollar  and 
its  cents,  or  hundred  equal  parts,  is  used  to  express  every  possi 
ble  price,  and  change  of  price,  of  every  article.  If  bullion  rises 
in  price,  silver  dollars  may  be  quoted  at  §1.05,  or  $1.10 ;  or,  if 
it  falls  in  value,  they  may  be  quoted  at  .97,  .98  or  .99 ;  and 
depreciated  bank-notes  are  readily  valued  at  any  part  of  a  dol 
lar,  from  one  cent  to  ninety-nine.  When  English  sovereigns  or 
shillings  are  paid  away  here,  they  are  not  paid  as  pounds  or 
shillings,  but  are  valued  in  our  money  of  account  at  whatever 
their  price  for  the  time  being  may  be. 

In  every  country,  when  all  the  transactions  by  book  accounts, 
all  the  purchases  upon  credit  and  for  paper-money,  all  the  com 
putations  by  money,  and  all  the  conversation  about  prices  are 
taken  into  account,  it  will  be  found,  that  all  these  taken  together 
immeasurably  exceed  all  the  transactions  in  actual  money  of  gold 
or  silver.  It  is  by  no  means  surprising,  then,  that  the  mental 
operations  by  which  all  the  vast  transactions  by  books  of  account, 
all  sales  on  credit  or  for  bank-notes,  all  this  continual  fixing  and 
naming  of  prices,  is  carried  on,  should  become  the  law  of  reckon 
ing,  to  which  every  description  of  money  itself  should  in  the  end 
become  subject.  Such  is  indeed  the  fact,  as  the  actual  state  of 
things  in  every  country  proves,  and  this  has  always  been  known 
to  intelligent  accountants  and  cambists.  It  has  been  prominent 
in  the  guide-books  of  merchants  and  bankers,  but  has  not  been 
so  familiar  to  statesmen,  political  economists,  and  theoretical 
writers  on  money.1  But  even  where  the  special  functions  of 

1  The  want  of  clear  views  of  the  nature  and  functions  of  money  of  account 
is  strikingly  exhibited  in  the  following  passage  from  a  work  of  the  late 
Leon  Faucher:  —  "The  effective  money  in  the  middle  ages  varying  con 
stantly,  and  being  at  the  mercy  of  every  prince,  to  be  altered  at  his  will, 
they  devised  a  money  of  account,  a  sort  of  abstract  or  fictitious  unit,  which 
might  remain  relatively  invariable  in  the  midst  of  monetary  fluctuations 
caused  by  the  unskilfulness  or  the  bad  faith  of  governments,  and  the  cus 
tom  is  preserved  in  some  States  to  this  day."  —  Sur  L'  Or  et  Sur  L' Argent, 
page  5. 

This  is  written  by  one  who  was  recently,  and  at  the  time  of  his  de- 


38  MOXEY    OF    ACCOUNT. 

money  of  account  have  been  understood,  there  has  not  been  suffi 
cient  attention  given  to  exhibit  the  actual  relations  between 
money  of  account  and  money  of  gold  and  silver ;  and  yet  neither 
can  be  fully  understood  until  both  are  understood.  "We  fre 
quently  find  them  utterly  confounded,  and  the  attributes  of  each 
referred  to  the  other.  There  is,  however,  no  difficulty  in  keep 
ing  their  offices  and  functions  separate,  when  the  distinction  is 
kept  in  view. 

The  value  of  an  article,  or  of  a  fixed  quantity  of  goods,  is  ex 
pressed  instantaneously  in  money  of  account.  The  merchant  who 
says  his  cloth  is  worth  a  dollar  a  yard,  is  understood  without 
producing  either  a  dollar  or  a  yard-stick.  When  a  sale  actually 
takes  place,  and  payment  is  to  be  made,  then  gold  or  silver, 
and  weights  or  measures,  become  necessary.  If  the  money  laid 
down  is  in  coins  corresponding  in  denominations  with  the  money 
of  account,  it  appears  to  favor  the  idea  that  the  article  sold  was 
measured  by  the  coins.  But  if  payment  is  made  in  the  precious 
metals  by  weight,  or  in  coins  not  corresponding  with  the  money 
of  account,  then  the  agency  of  the  money  of  account  is  called  in 
to  express  the  price  of  the  bullion  by  weight,  or  of  each  coin : 
so  that  the  transaction  is  completed  by  the  employment  of  money 
of  account  in  fixing  the  price  of  the  merchandize,  in  adding  the 
sum  of  various  articles  and  their  prices  together,  to  ascertain  the 
whole  amount  of  the  sale,  and  in  fixing  or  expressing  the  value 
of  every  coin  offered  in  payment.  In  many  large  establishments 
for  the  sale  of  merchandize,  salesmen  are  employed  in  making 
sales  of  vast  quantities  of  goods,  with  the  prices  of  which,  in  all 
quantities  and  varieties,  they  are  perfectly  familiar,  actually 
spending  the  most  of  their  time  in  naming  and  discussing 
them ;  but  few  of  these  salesmen,  however  adroit,  can  tell  the 

cease,  a  minister  of  finance,  and  certainly  a  man  of  ability.  He  was 
employing  the  money  of  account  of  France  every  day,  he  was  familiar  with 
it,  he  would  have  been  utterly  at  a  loss  without  it,  yet  he  accounted  it  as  a 
barbarous  relic  of  the  dark  ages.  It  is  like  an  atmosphere  to  finance ;  it  is 
the  very  language  of  financiers ;  they  can  neither  think  nor  communicate 
their  ideas  without  it ;  yet  its  agency  and  use  is  alleged  to  have  belonged 
to  the  middle  ages! 


MOXEY    OF    ACCOUNT.  39 

price  of  gold  or  silver  by  the  pound,  ounce  or  pennyweight,  or 
the  value  of  any  coin  of  those  metals,  except  a  few  domestic 
coins.  When  large  payments,  therefore,  are  made  in  bullion  or 
mixed  coins,  the  receiving  these  is  referred  to  another  clerk,  who 
knows  both  their  quality  and  price. 

Any  one  who  will  take  the  trouble  to  recall  to  his  mind  the 
course  of  such  transactions  will  perceive  that  money  of  gold  or 
silver  is  not  employed  as  a  measure,  even  when  it  is  used  in  pay 
ment,  which  is  very  rare  in  large  transactions.  The  precious 
metals  as  frequently  require  measurement  or  estimation  as  the 
articles  for  which  they  are  given  in  payment.  It  is  no  more 
difficult  to  express  the  true  value  of  coins  or  bullion  than  of 
any  other  article  of  value.  Their  chief  advantage  lies  in  their 
safety  and  convenience  as  a  medium  of  exchange  —  an  imperish 
able  equivalent  in  retail  dealing,  so  important  to  every  condition 
and  class  of  men  —  and  not  in  the  fact  that  they  can  be  or  are 
used  as  actual  measures  or  standards.  They  are  standards  of 
coinage,  not  of  price  or  value.  The  term  standard  of  value  can 
not  be  too  strongly  condemned.  As  a  matter  of  fact,  gold  and 
silver  are  employed  only  as  standards  of  payment  in  the  current 
transactions  of  commerce.  The  invariable  formation  of  a  money 
of  account,  which,  while  the  precious  metals,  or  some  substitute, 
remain  the  medium  of  exchange,  or  the  instrument  of  payment, 
becomes  the  medium  of  comparison,  the  expression  of  equiva 
lents,  the  language  of  prices,  obviates  equally  all  need  of  a  mea 
sure  or  standard  of  value  for  any  article  which  has  any  price. 
By  aid  of  this  mode  of  expressing  prices,  the  largest  transactions 
can  be  instantly  accomplished,  and  notes  or  checks  given  in 
payment,  without  the  aid  or  presence  of  coins  or  bullion,  or  any 
thought  of  or  reference  to  them,  and  without  the  knowledge 
necessary  to  make  the  payment  in  coins  or  bullion.1 

1  We  refer  the  reader,  for  some  illustrations  of  this  subject,  to  "  Kelly's 
Cambist,"  ]  a  work  of  admitted  authority,  founded  upon  information  ob 
tained  with  great  labor  and  expense,  in  which  the  author  was  aided  by  the 

1  The  Universal  Cambist  and  Commercial  Instructor,  being  a  full  and  accurate  Trea 
tise  on  the  Exchanges,  Coins,  Weights  and  Measures  of  all  dealing  Nations.  By  P. 
Kelly,  LL.D.  2  vols.  4to. 


40  MONEY     OF    ACCOUNT. 

The  moneys  of  account  of  France,  England,  and  the  United 
States  are  as  completely  established,  and  their  functions  as  corn- 
British  government.  Although,  on  the  subject  for  which  we  refer  to  this 
useful  book,  we  find  much  confusion  of  terms,  and  great  need  of  more  dis 
crimination,  yet  there  are  facts,  enough  to  guide  the  reader  to  very  certain 
conclusions,  and  clear  views.  lie  distinguishes  money  into  real  and  imagi 
nary  ;  the  real  are  coins,  bank-notes,  &c. ;  the  imaginary,  "also  called 
ideal  moneys,  are  not  represented  by  any  coin,  but  are  used  in  keeping 
accounts.  They  are  understood  to  have  had  their  foundation  in  real  coins 
or  weights,  which  were  the  original  units  adopted  as  the  measures  of  value, 
and  which  have  been  continued  under  the  same  denominations.,  notwith 
standing  the  changes  that  may  have  taken  place  in  their  intrinsic  value." — 
"Although  moneys  of  account  be  not  represented  by  real  coins,  yet  their 
intrinsic  value  may  be  determined  by  their  known  relation  or  proportion  to 
certain  coins."  —  "Moneys  of  account  may  be  considered  with  respect  to 
coins  as  weights  and  measures,  with  respect  to  goods ;  or  as  a  mathematical 
scale,  with  respect  to  maps,  lines,  or  other  geometrical  figures.  Thus  they 
serve  as  standards  of  the  value  both  of  merchandize  and  the  precious  metals 
themselves.  It  should,  however,  be  remarked,  that  moneys  of  account, 
though  they  are  uniform  as  a  scale  of  divisions  and  proportions,  yet  they 
fluctuate  in  their  intrinsic  value  with  the  fluctuation  of  the  coins  which  they 
measure  or  represent."  The  terms  standard  of  value,  measures  of  value, 
intrinsic  value,  and  representation,  as  applied  to  moneys  of  account,  is  open 
to  strong  objection ;  but  the  meaning  of  the  author,  on  the  whole,  is  suffi 
ciently  obvious. 

Moneys  of  account  have  "  their  foundation  in  real  coins  or  weights ;"  and 
they  often  remain  unchanged,  although  the  coin  or  weight  on  which  they 
are  founded  may  have  undergone  many  changes.  When  once  well  esta 
blished,  they  become  capable  of  expressing  the  prices  of  both  goods  and  the 
precious  metals.  By  their  intrinsic  value  he  means  the  value  of  the  unit 
represented  in  the  precious  metals.  Moneys  of  account  do  change  with  the 
gradual  changes  in  the  value  of  coins,  if  the  denominations  of  the  coins  are 
the  same  with  those  of  the  money  of  account ;  because  the  mass  of  the 
people  in  whose  minds  the  money  of  account  is  fixed,  fail  to  distinguish 
between  them  when  both  are  called  by  the  same  names.  But  when  the  money 
of  account  does  not  correspond  with  any  coin,  it  does  not  fluctuate,  nor  even 
tend  to  fluctuate,  with  the  precious  metals  or  coins ;  but  remains  steady, 
and  quite  capable  of  marking  and  expressing  the  variations  in  the  value  of 
coins  and  bullion.  The  "  Cambist"  '  furnishes  "  a  Table  of  moneys  of 
account,"  of  which  it  is  remarked,  "  that  some  of  these  are  real  coins,  the 
value  of  which  may  be  computed  from  the  mint  regulations,  or  from  assays; 
but  when  they  are  imaginary  moneys,  which  is  generally  the  case,  their 
1  Vol.  II.,  page  148.  Edition  of  1835. 


MONEY    OF    ACCOUNT.  41 

pletely  performed,  as  elsewhere ;  although  the  franc,  the  sove 
reign  or  pound,  and  the  dollar  coins,  agree  with  the  unit  of  the 
money  of  account.  To  understand  the  system  of  money  in  any 
country,  the  first  requisite  is  to  know  in  what  terms  or  denomi 
nations  accounts  are  kept,  prices  fixed  and  expressed,  and  all  the 
dealings  of  the  people  carried  on ;  this,  whatever  it  may  be,  and 
whether  any  coins  correspond  or  not,  is  the  money  of  account 
of  that  country.  The  chief  difficulty  in  understanding  the 
subject  of  moneys  of  account  and  coinage,  is  the  blending  them 
or  not  keeping  them  wholly  apart  as  distinct  things.  It  will  be 
found,  as  a  matter  of  fact,  that  in  every  country  the  money  of 
account  is  used  to  express  the  value  of  coins,  and  that  coins  do 
not  serve  essentially  to  give  effect  to  the  money  of  account. 
Where  there  is  a  coin  corresponding  with  the  unit  of  the  money 
of  account,  it  is  true  it  presents  the  value  which  the  other 
expresses.  It  is  proper,  in  England,  to  say  that  the  coin  called 
a  sovereign  is  worth  a  pound  sterling;  but  it  is  not  proper  to 
say  that  a  pound  sterling  is  worth  a  sovereign.1  The  pound  is 
the  unit  of  the  British  money  of  account,  and  it  is  employed  not 
only  to  express  the  value  of  the  sovereign,  but  the  value  or  price 
of  every  other  coin  or  quantity  of  gold  over  that  amount.  There 
is  a  money  of  account  in  Great  Britain,  based  on  the  shilling, 
which  is  seldom  employed  beyond  the  value  of  three  or  four 
pounds ;  prices  are  frequently  expressed  in  shillings,  from  one 
to  sixty  or  eighty,  but  seldom  beyond  that  amount,  though  there 

value  must  be  found  by  their  established  proportion  to  real  coins."  This 
table  sets  forth  over  one  hundred  and  twenty  different  moneys  of  account, 
and  exhibits  the  fact  that  several  countries  have  more  than  one,  and  some 
as  many  as  five;  a  fact  which  is  a  proof  that  past  monetary  revolutions  are 
not  only  productive  of  misfortune  and  damage  at  the  time,  but  of  enduring 
evil  and  inconvenience  afterwards.  A  want  of  precision  in  the  language 
of  the  author,  on  the  subject  of  moneys  of  account,  is  apparent  through  the 
•whole  work;  and  yet  a  little  attention  only  is  requisite  to  comprehend  his 
statements.  It  is  only  needful,  for  this  purpose,  to  remember  that  the 
money  of  account  is  not  only  as  operative,  but  as  necessary,  to  commercial 
dealing,  where  the  coins  correspond  with  it,  as  where  they  do  not. 

1  The  sovereign  is  a  recent  coin,  and  when  first  issued  was  made  to  con 
form  to  the  minutest  fraction  in  the  pound  of  the  money  of  account.  See 
infra,  Chapter  4. 


42  MONEY    OF    ACCOUNT. 

is  no  difficulty  in  understanding  those  who  express  prices  in- 
shillings  to  .any  amount  not  too  large  to  be  converted,  mentally 
and  instantly,  into  pounds.  This  double  money  of  account  is  an 
argument,  in  England,  for  the  adoption  of  the  decimal  system, 
which  furnishes  a  relation  between  the  unit  of  the  money  of 
account  and  its  parts,  much  more  easily  carried  in  the  mind  than 
that  used  in  the  British  system  of  money.  It  would  be  much 
easier  to  apprehend  the  value  of  any  part  of  a  pound  expressed 
in  hundredths,  than  in  shillings  and  pence ;  and  this  perfect  faci 
lity  of  perceiving  the  relation  of  all  the  parts  of  the  unit  to  the 
unit  itself,  saves  the  formation  and  use  of  a  subsidiary  money 
of  account,  like  that  of  the  shilling.  In  the  United  States  we 
express  many  prices  in  cents,  but  we  always  perceive  the  rela 
tion  of  the  number  of  cents  to  the  dollar ;  and,  in  fact,  the  com 
mon  mode  of  writing  cents  is  fractionally  as  -f0Q0,  instead  of  20 
cents.1 

1  The  confusion  which  reigns  in  the  minds  of  many  men,  as  to  the  exist 
ence  and  functions  of  a  money  of  account,  is  strikingly  illustrated  in  the 
discussions  now  pending  in  England  on  the  adoption  of  a  decimal  system. 
While  many  understand  its  true  idea  and  use,  and  intelligently  explain  the 
difficulties  and  nature  of  the  proposed  change  ;  others,  for  want  of  this  cor 
rect  conception,  carry  confusion  into  the  whole  discussion  by  speaking  only 
of  coinage.  Some  of  the  reformers  absurdly  proposed  changing  the  unit  of 
their  money  of  account,  the  pound  sterling.  A  greater  mischief  can  scarcely 
be  conceived ;  certainly  a  more  needless  evil  could  not  be  inflicted  on  the 
country.  Pounds  are  already  counted  decimally  ;  it  is  only  the  parts  or  frac 
tions  of  a  pound  to  which  the  reform  applies.  It  is,  in  fact,  the  shilling  money 
of  account  which  is  to  be  changed.  The  coinage  part  of  the  question  is  com 
paratively  of  little  importance.  To  change  the  money  of  account  of  a  nation 
like  Great  Britain  is  indeed  a  serious  affair,  and  demands  the  utmost  cau 
tion  and  investigation.  The  best  mode  of  effecting  this  change,  as  it  strikes 
us,  is  that  which  has  in  part  received  the  approval  of  Parliament,  the  British 
public,  and  the  greater  number  of  those  who  have  written  on  the  subject.1 
This  preserves  the  pound  unit  of  account,  without  displacing  the  shilling 
as  a  coin.  It  involves  the  lowering  the  copper  coinage  four  per  cent.,  which, 
in  practice,  would  not  be  found  to  work  injuriously.  The  mint  would  take 
the  old  copper  coins  at  a  premium  of  four  per  cent.,  payable  in  the  new 
issue.  The  dealers  would  give  as  much  for  the  old  coins  as  ever  they  did, 

*  The  pound  and  mil  system,  in  which  1000  mils  make  a  pound.  The  copper  coin 
age  is  lowered  four  per  cent,  which  makes  mils  and  farthings  equivalents. 


MONEY    OF    ACCOUNT.  43 

When  it  was  recently  proposed,  in  England,  to  adopt  a  deci 
mal  system,  dispensing  with  the  pound  as  the  unit  of  the  money 

because  they  could  be  reimbursed  by  the  change  into  new  coinage.  The 
British  system  virtually  includes  four  moneys  of  account ;  one  with  the 
pound  unit  already  counted  decimally ;  one  with  the  shilling  unit ;  one 
with  the  penny  unit ;  and  another  with  the  farthing.  The  change  proposed 
is  to  dispense  with  the  three  latter,  and  have  them  absorbed  in  the  first.  In 
fact,  it  will  be  found  not  to  be  a  question  of  coinage,  except  the  copper 
money,  but  a  question  of  the  mental  habits  of  the  people. 

In  spite  of  all  that  can  be  done,  the  people  of  Great  Britain  will  reckon 
by  shillings  for  at  least  a  half  century  to  come.  This,  however,  will 
not  disturb  the  adoption,  nor  prevent  the  success,  of  the  proposed  money 
of  account.  It  is  now  seventy  years  since  the  decimal  system  of  this 
country  was  legally  adopted ;  and,  during  all  that  time,  the  Spanish  coins, 
halves,  quarters,  eighths  and  sixteenths  of  a  dollar,  have  circulated  con 
currently  with  our  decimal  coinage.  They  have,  doubtless,  obstructed 
in  some  degree  the  complete  adoption  of  the  decimal  money  of  account  in 
the  expression  of  prices  and  sums  under  one  dollar.  But  for  the  last  forty 
years  prices  under  one  dollar  have  been  expressed,  if  not  exclusively  in 
cents,  at  least  with  equal  facility,  and  to  a  much  greater  extent,  in  cents 
than  in  the  terms  of  the  Spanish  coin.  Both  are  yet  employed,  and  both 
generally  understood.  The  term  shilling,  in  the  State  of  New  York,  maintains 
its  place  fully,  as  it  corresponds  with  the  Spanish  eighth  ;  but  the  eleven- 
penny-bit  of  Pennsylvania,  and  the  nine-pence  of  Massachusetts  and  Vir 
ginia,  representing  the  same  amount,  or  12J  cents  of  our  decimal  system, 
have  nearly  disappeared.  These  Spanish  coins,  which  for  fifty  years  greatly 
outnumbered  our  decimal  coinage,  were  readily  valued  in  our  money  of 
account,  and  the  gain  over  the  old  system  has  been  immense.  The  difficulty, 
in  England,  is  really  less  than  we  have  had  to  encounter.  The  money  of 
account  founded  upon  the  pound  unit  can  be  introduced  in  far  less  time 
than  it  required  to  introduce  the  system  of  the  United  States,  because  the 
pound  unit  is  retained.  Here  it  is  given  up  for  the  dollar.  There  the  shil 
ling  may,  and  should  be,  retained  as  a  coin  ;  and  will  not  only  prevent  con 
fusion  in  the  minds  of  those  who  cannot  at  first  understand  the  nature  or 
the  reason  of  the  change,  but  greatly  aid  and  facilitate  the  progress  of  the 
measure.  The  shilling  bears  the  same  relation  to  the  pound  that  a  half 
dime  does  to  a  dollar  in  the  United  States:  or,  one-twentieth  of  a  pound. 
While  the  people  are  learning  the  new  system,  the  old  coins  which  form  a 
part  of  it  will  enable  them  to  avail  themselves  of  the  old  system,  until  they 
become  equally  familiar  with  the  new. 

The  merchants,  bankers,  brokers,  and  dealers  in  bullion,  can  exercise  the 
most  effective  influence  in  introducing  the  new  money  of  account.  Let 
prices  be  named  both  ways ;  let  bills  be  made  out  with  the  sums  expressed 


44  MONEY    OF    ACCOUNT. 

of  account,  Professor  Airey,  who  was  examined  by  the  Parlia- 
men^ary  committee  on  the  subject,  said :  —  "I  can  scarcely  con- 
both  ways,  for  which  the  stationery  should  be  prepared,  and  paper  properly 
ruled.  This  part  of  the  business  expert  tradesmen,  bankers  and  clerks  will 
master  in  a  fortnight.  Their  customers,  or  most  of  them,  must,  however, 
be  dealt  with  in  pounds,  shillings  and  pence  for  many  years.  For  in  this 
money  of  account  will  the  greater  number  continue  to  think,  long  after  the 
account-books  of  the  government,  of  the  banks,  and  the  principal  merchants, 
are  kept  by  the  new  s}rstem.  The  books  of  the  Bank  of  England  might  be 
all  safely  opened  upon  the  new  system  within  a  year,  or  less,  from  the  time 
the  measure  was  resolved  upon ;  and  so  of  all  other  large  establishments. 
But  cashiers,  tellers,  and  others  in  like  positions,  would  be  obliged  to  be 
equally  familiar  with  both  systems,  and  to  be  able  to  translate  sums  instan 
taneously  from  one  to  the  other.  Great  advantage  would  be  gained  very 
soon  ;  but  the  entire  and  universal  adoption  of  the  new  money  of  account 
could  not  have  place  for  from  twenty  to  fifty  years.  The  inconveniences 
of  this  gradual  progress  would  not  be  equal,  as  a  whole,  to  those  of  the  pre 
sent  system.  It  would,  in  fact,  be  a  measure  completely  successful  for  those 
persons  and  institutions  who  most  require  and  need  the  change. 

It  is  a  happy  circumstance  for  the  success  of  this  measure,  that  so  little 
change  in  the  coinage  is  required.  None  would,  indeed,  be  far  better  than 
too  much.  It  would  be  highly  useful,  it  seems  to  us,  to  have  the  new  pieces 
of  the  same  value  as  the  shilling  and  sixpence,  having  the  same  impression 
coined,  with  the  addition  in  figures  of  their  value  in  the  new  money  of 
account.  Every  shilling  and  sixpence  would  be  a  lesson,  and  an  aid  to  the 
memory.  With  this  addition  there  woul$  be  less  objection  to  the  old  crowns 
and  half  crowns,  than  to  any  possible  new  coins. 

Of  the  other  plans  of  introducing  the  decimal  system  of  money  into  Great 
Britain  which  have  been  proposed,  none  appear  to  us  so  safe  and  desirable 
as  the  one  already  approved  by  the  House  of  Commons.  Many  of  them 
betray  a  total  misconception  of  the  whole  subject,  and  deserve  not  a  mo 
ment's  consideration.  The  attempt  at  a  universal  system  of  coinage  enter 
tained  by  some  is  only  a  little  less  visionary  than  an  universal  language. 
Changing  coins  does  not  change  moneys  of  account.  Governments  may  order 
new  coins,  but  the  people  will  not  always  reckon  by  them.  The  best  devised 
system  of  universal  coinage  could  not,  with  all  the  power  of  modern  Euro 
pean  governments,  be  forced  upon  the  people  in  a  century,  if  at  all.  As 
with  coins,  so  with  weights  and  measures.  They  cannot  be  changed  upon 
the  ground  of  general  conformity,  because  the  inconvenience  of  the  change 
will  endure  for  a  whole  generation  of  those  who  are  asked  to  make  it.  The 
weights  and  measures  in  general  use  are  so  fixed,  as  to  their  meaning,  in 
the  minds  of  the  people,  that  any  proposal  of  change  alarms  them,  or,  if  it 
causes  no  alarm,  it  will  not  be  received.  The  French  system  of  weights  and 


MONEY    OF    ACCOUNT.  45 

ceive  it  possible,  except  by  the  most  violent  and  offensive  mea 
sures,  to  change  the  principal  money  of  account  from  its  present 
value  of  the  pound  sterling.  Every  estimation  of  large,  and 
even  of  very  moderate  sums,  is  formed  by  the  pound.  I  do  not 
attach  great  importance  to  such  things  as  the  national  debt,  or 
the  rental  of  the  country ;  but  the  price  and  rental  of  private 
estates,  the  salaries  of  officers,. the  annual  wages  of  servants  — 
in  larger  matters,  the  expense  of  constructing  a  railway,  or  sail 
ing  a  ship  —  all  are  estimated  by  pounds.  An  alteration  of  the 
value  of  the  pound  would  unhinge  every  estimate  and  contract 
in  England.  I  say,  advisedly,  every  contract  for  the  shilling  is 
inseparably  connected  with  the  pound ;  and  every  contract  which 
is  not  ostensibly  made  by  the  pound,  is  made  by  the  shilling."1 

It  is  remarked  by  Dr.  Bowring,  in  his  instructive  little  work 
on  the  decimal  system,  that,  "  To  the  pound  sterling  the  most 
distinct  and  definite  ideas  attach,  whether  on  large  or  small 
amounts.  Mention  a  pound,  five  pounds,  ten  pounds,  fifty 
pounds,  a  hundred  pounds,  a  thousand  pounds,  ten  thousand 
pounds,  and  your  meaning  is  comprehended  by  everybody."' 

Every  one  is  acquainted  with  a  large  class  of  prices,  and 
knows  a  great  number  of  articles  which  can  be  purchased  for  a 
pound,  for  five  or  for  ten  pounds ;  the  wages  of  a  man  for  a  year, 
the  price  of  a  horse,  the  rent  of  a  farm,  the  cost  of  a  cottage  or 
first-class  dwelling,  the  value  of  a  ship,  the  cost  of  a  steam 
engine :  all  such  valuations  are  carried  in  the  mind,  and  are 

measures,  so  much  boasted,  has  made  its  way  only  very  gradually  in  France. 
It  is  even  yet  but  partially  adopted,  and  is  now  admitted  to  have  defects 
which  should  be  corrected  before  it  extends  further.  It  could  not  have 
passed  so  extensively  into  use,  if  it  had  not  been  originated  at  a  time 
when  change  was  the  order  of  the  day ;  when  all  old  things,  and  old  insti 
tutions,  were  under  the  process  of  being  exploded,  reformed  or  modified. 

The  French  system  could  not  be  forced  upon  Germany,  nor  Great  Britain, 
nor  upon  the  United  States.  Those  who  are  laboring  for  the  desirable  object 
of  an  universal  system  of  coins,  and  weights  and  measures,  must  fail  of  suc 
cess,  because  the  complications  and  difficulties  to  be  overcome  are  equally 
beyond  the  reach  of  science,  authority  and  individual  enterprise. 

1  Minutes  of  Evidence  on  Decimal  System,  page  30.     Bowring's  Deci 
mal  System. 

2  The  Decimal  System,  by  Sir  John  Bowring,  page  104. 


46  MONEY    OP    ACCOUNT. 

expressed  in  money  of  account.  In  naming  such  prices,  or 
expressing  such  estimates,  those  who  use  them  have  no  reference 
to  any  quantity  of  gold  or  silver ;  for,  among  those  who  thus 
freely  speak  of  prices,  few  could  tell,  or  without  help  ascertain, 
the  value  of  a  quantity  of  the  precious  metals  corresponding  to 
any  large  sum  named  by  them.  If  the  owner  of  a  cottage,  valued 
by  him  at  a  thousand  pounds,  were  to  have  gold  to  that  amount 
laid  before  him  in  payment,  he  would  be  utterly  at  a  loss  as  to 
its  real  value.  If  the  amount  were  in  sovereigns,  he  could  count 
them ;  and  as  each  sovereign  bears  the  mint  certificate  that  it 
contains  gold  to  the  value  of  a  pound,  he  would  take  the  1000 
sovereigns  for  .£1000,  not  on  his  own  knowledge,  but  on  the  faith 
of  the  public  coinage.  The  estimate  of  the  article  is  made  in 
pounds,  and  the  price  is  perfectly  understood  by  both  buyer  and 
seller,  whether  payment  is  made  at  the  time  or  not.  If  made  in 
gold  bullion,  it  would  be  carried  to  a  dealer  in  bullion  to  be 
weighed  and  valued ;  if  in  sovereigns,  they  would  be  received,- 
not  because  the  receiver  knew  either  the  genuineness  of  the  gold, 
or  that  the  coins  contained  the  requisite  quantity  of  gold  to  be 
equal  to  a  pound,  but  they  would  be  received  solely  on  the  faith 
of  the  impression  on  the  coin  indicating  both  quantity  and 
quality. 

§  3.  British  money  of  account —  The  pound  sterling  —  Guinea  —  Sir  Isaac 
Newton  —  Earl  Liverpool  —  System  of  1816 — Why  fractions  in  weight 
of  coins —  Coins  are  adjusted  to  money  of  account  —  "  What  is  a  pound?" 
— Fixed  price  of  precious  metals  —  Influx  of  gold  —  Depreciation  post 
poned^  but  yet  to  come  —  Remedy  —  Suspension  of  payments  in  Great 
Britain,  in  1797. 

In  further  illustration  of  the  subject,  we  shall  notice  specially 
some  of  the  more  noted  moneys  of  account,  and  such  as  may 
appear  best  fitted  to  explain  their  nature  and  functions. 
The  British  money  of  account  derives  its  terms  from  the  fact 
that  English  coinage  was  founded  upon  the  pound  of  silver,  out 
of  which  was  coined  twenty  shillings.  Since  that  time,  the  money 
of  account  for  expressing  large  sums  has  been  the  pound  unit, 
for  small  sums,  the  shilling ;  but  owing  to  various  abuses  of  the 
coinage,  and  other  facts  which  we  cannot  recount  here,  the  pound 


MONEY    OF    ACCOUNT.  47 

of  silver  which  at  first  was  coined  into  twenty,  is  now  coined  into 
sixty-six  shillings.  The  money  of  account  of  England  has  passed 
through  just  so  many  changes  as  have  concurred  to  bring  down 
the  pound  of  the  former  money  of  account,  expressing  the  equiva 
lent  of  a  pound  of  silver,  to  the  pound  of  the  present  money  of 
account,  which  is  not  equivalent  to  the  third  of  a  pound  of  silver. 
At  this  point  it  has  remained  unchanged  for  more  than  a  cen 
tury.  From  the  reign  of  Charles  II.  until  the  year  1816,  when 
the  sovereigns  were  coined,  the  pound  sterling  had  no  corre 
sponding  piece  in  the  coinage.  The  guinea  was  intended  as  a 
coin  to  be  of  the  value  of  a  pound,  but  not  having  been  correctly 
adjusted,  its  greater  value  was  at  once  shown  by  its  price  ex 
pressed  in  the  money  of  account ;  and  the  price  of  gold  fluc 
tuating,  it  varied  correspondingly  in  price  until  the  year  1717, 
when  it  was  fixed  by  Sir  Isaac  Newton  at  twenty-one  shillings, 
at  which  rate  it  has  remained  under  regulation  of  the  mint. 

In  1816,  under  the  advice  of  the  Earl  of  Liverpool,  and  in 
pursuance  of  his  elaborate  report,1  gold  was  adopted  as  the  legal 
tender  of  Great  Britain,  and  a  coinage  of  sovereigns  ordered. 
In  making  this  important  change,  if  it  had  been  regarded  merely 
as  a  matter  of  coinage,  it  can  hardly  be  conceived  that  the  weight 
for  this  new  coin  would  have  been  fixed  at  five  pennyweights, 
three  grains  and  JJJ-  of  a  grain.  We  ask,  for  the  sake  of  those 
to  whom  the  idea  of  a  money  of  account  is  not  familiar,  why  this 
special  quantity  of  gold,  involving  so  minute  a  fraction,  was  to 
constitute  the  sovereign,  which  was  to  be  thereafter  the  most 
important  coin  of  Great  Britain  ?  Coins  are  easily  made  of  any 

1  Letter  to  the  King  on  the  coinage  of  the  Realm.  4to,  London,  1805. 
This  very  elaborate  report,  in  which  there  is  much  to  admire  and  to  learn, 
exhibits,  however,  that  confusion  of  ideas  and  expression  which  characterize 
all  writings  on  money  by  authors  who  know  nothing  of,  or  who  disregard  the 
money  of  account.  The  eighth,  ninth  and  tenth  pages  of  this  celebrated 
document  furnish  abundant  proof  of  the  difficulties  encountered  by  those 
who  endeavor  so  to  define  money  in  coins  as  to  include  all  the  functions  of 
a  money  of  account.  The  introduction  of  the  money  of  account  removes  all 
the  difficulties  so  strongly  felt  by  the  Earl  of  Liverpool. 

Notes  of  the  Bank  of  England  were  then,  and  have  been  ever  since,  a 
legal  tender  in  England. 


48  MONEY    OF    ACCOUNT. 

•weight,  and  they  are  readily  changed.  Why  did  the  British 
government  determine  to  coin  46  Jg  sovereigns  from  a  pound  of 
gold  ?  Why  admit  such  fractions  into  their  coinage  ?  Why  not 
make  the  coins  even  parts  of  a  pound,  so  that  every  one  might 
know  the  quantity  of  gold  in  his  coins,  as  well  as  the  value  ? 
The  reason  was,  that  the  British  government  having  resolved 
that  the  pound  sterling  should  be  represented  in  the  coinage, 
there  could  be  no  discretion  as  to  the  quantity  of  gold  in  the 
sovereign,  for  the  value  of  a  pound  sterling  was  well  known  to 
all  the  people,  and  had  remained  unchanged  for  more  than  a 
century,  and,  but  for  unwise  legislation,  or  want  of  legislative 
care,  would  remain  far  more  steady,  and  freer  from  fluctuations, 
than  gold  or  silver.  The  sovereign  was  then  necessarily  made 
to  weigh  5  dwts.  3J-J-J  grains,  that  it  might  represent  the  British 
unit  of  money  of  account ;  that  is,  it  was  made  the  equivalent 
of  a  value  known  and  fixed  before.1  The  British  government 
did  not  create  or  enact  the  money  of  account ;  it  grew  up  with 
the  progress  of  the  nation,  and  although  it  had  undergone  muta 
tions  under  abusive  regulations,  yet  it  remained  unchanged  from 

1  The  Franc  of  France  weighs  (silver) 76.5  grains. 

Napoleon,      "  "       (gold) 99.2 

Sovereign,  England,  "  "      122.5         " 

Shilling,  "         "       (silver) 86.5 

Dollar,  U.  States,        "  "       412.5 

Eagle,       "  "       (gold) 258. 

The  coins  here  mentioned,  and  all  others,  are  accurately  adjusted  in  weight 
to  the  unit  of  the  respective  moneys  of  account  they  represent.  The  money 
of  account  is  not  changed  to  suit  the  coins,  but  the  latter  to  represent  the 
former.  Where  this  adjustment  is  not  correct,  as  was  the  case  with  our 
gold  coins  before  1834,  the  coins  will  not  circulate.  If  coins  are  undervalued 
in  the  money  of  account,  they  will  be  melted  or  exported  ;  if  overvalued, 
they  will  be  refused.  The  adjustment  of  the  coin  to  the  unit  of  the  money, 
or  the  part  it  purports  to  represent,  must  be  correct  to  the  minutest  frac 
tion.  This  is  because  coins  are  made  a  legal  tender.  Bars  of  gold  or 
silver  of  any  size  may  circulate  by  weight  at  the  market  price.  Coinage, 
with  a  law  making  the  coins  a  legal  tender,  is  fixing  the  price  by  law  of  the 
precious  metals,  and  is  open  to  serious  objections  when  applied  to  larger 
sums.  All  that  a  government  can  do,  in  the  way  of  fixing  this  price,  is  to 
force  creditors  to  take  them  at  the  price  fixed. 


MONEY    OF    ACCOUNT.  49 

the  time  it  ceased  to  be  improperly  tampered  with  and  abused. 
This  the  government,  in  the  measure  of  1816,  wisely  chose  to 
respect. 

It  was  a  prominent  feature  of  this  measure,  that  it  fixed  the 
price  of  gold.  The  British  pound  would  have  remained  steady, 
and  capable  of  expressing,  by  its  fractions,  every  variation  in  the 
price  of  gold ;  but  the  emission  of  a  coin  as  the  equivalent  of  a 
pound  made  it  difficult  for  any  but  dealers  in  bullion  to  tell  when 
gold  changed  in  value.  Two  things,  essentially  distinct,  were 
thus  blended  in  the  minds  of  the  mass  of  the  people ;  dealers  in 
bullion  alone  could  d-etect  changes  in  the  value  of  gold,  but 
the  people  could  not  distinguish  between  the  pound  of  the  money 
of  account  and  the  sovereign.1  This  difficulty  was  increased, 

1  "If  we  have  attained  a  clear  conception  of  the  functions  of  the  money 
of  account,  we  are  able  to  answer  the  question,  WHAT  is  A  POUND?  by  sim 
ply  replying,  that  it  is  the  unit  of  the  money  of  account  of  Great  Britain. 
The  value  of  that  unit,  or  its  power,  everybody  in  that  country  knows.  The 
statute  which  fixes  the  mint  price  of  gold  in  England  is  an  application  of 
the  money  of  account  by  Parliament  to  the  article  of  gold ;  and  it  really  no 
more  changes  the  nature  of  the  money  of  account,  when  applied  by  law  to 
express  the  value  of  an  ounce  of  gold,  than  if  a  merchant  had  so  used  it. 
The  price  of  an  ounce  of  gold  is  declared,  by  statute,  to  be  permanently  at 
£3  17*.  10£d.,  and  the  Bank  of  England  is  required  to  purchase  it  from  all 
who  offer,  at  £3  17s.  9d.  Although  the  effect  of  thus  declaring  permanently 
the  value  of  gold  may  confuse  the  minds  of  many,  and  lead  them  to  infer 
that  the  ounce  of  gold  is  the  £3  17s.  10%d.,  it  does  not  remain  the  less  true 
that  it  is  a  simple  expression  of  value,  and  that  the  ounce  of  gold  and  the 
£3  17s.  10£d.  are  not  convertible  terms,  because  the  latter  expresses  the 
value  of  the  former.  It  may  be  asked,  what  did  £3  17s.  10£eZ.  mean  before 
it  was  used  by  the  statute  to  denote  the  value  of  an  ounce  of  gold?  Did 
not  people  understand,  by  £3  17s.  W%d.,  the  same  thing  after  its  use  in  the 
statute  as  before?  And  how  many  thousands  reckon  familiarly  in  pounds, 
shillings,  and  pence,  who  know  nothing  about  the  mint  price  of  gold. 

"If  a  British  statute,  or  proclamation,  declares  the  gold  Napoleon  of 
France  to  be  worth  15s.  I0$d.,  that  is  not  merely  declaring  the  Napoleon  to 
be  worth  its  weight  in  gold,  it  is  the  expression  of  the  value  in  English 
money  of  account;  it  is  not  the  same  as  if  it  had  declared  that  the  Napo 
leon,  weighing  ninety-nine  grains  and  two-tenths,  is  equal  in  value  to 
ninety-nine  grains  arid  two-tenths  of  gold.  Such  a  declaration  as  this  would 
only  be  intelligible  to  those  familiar  with  the  process  of  weighing  gold.  To 
say  that  a  Napoleon  is  worth  15s.  10^c7.  is  perfectly  intelligible  to  every 

4 


50  M  0  N  E  Y    0  F    A  C  C  0  U  N  T  . 

and  the  confusion  confirmed,  by  the  enactment  making  sove 
reigns  a  legal  tender  for  debts,  at  the  rate  of  a  pound  sterling ; 
this  was  fixing  the  price  of  gold  by  law,  and  fastening  the  money 
of  account  to  gold,  whatever  might  be  its  fluctuations.  When 
this  wras  done,  the  mint  price  of  gold  was  <£3  17s.  lOJc?. ;  and  this 
became,  under  that  enactment,  thenceforward  the  fixed  price  of 
gold  in  Great  Britain,  at  which  all  persons  were  compelled  to 
receive  it  in  payment.  Whatever  may  be  said  of  the  policy  of 
fixing  the  price  of  any  article,  even  that  designated  for  money 
by  lavr,  it  cannot  be  questioned  that  it  was  a  false  step  to  endan 
ger  the  steadiness  of  the  money  of  account  by  fastening  it  to  any 
coin  or  quantity  of  gold.  The  function  of  money  of  account 
being  to  express  and  register  values  or  prices,  whatever  tended 
to  confuse  its  operation,  change  its  power,  or  render  its  expres 
sions  less  intelligible  or  less  reliable,  was  surely  to  be  avoided. 
Such  a  measure,  if  gold  remained  unchanged  in  value,  could 
have  no  other  ill  effect  than  preventing  people  from  apprehend 
ing  clearly  the  distinction  between  the  unit  of  the  money  of 

English  ear;  but  if  YOU  were  to  ask  the  exact  weight  in  gold  which  would 
be  equivalent  to  15s.  lOJc?.,  not  one  person  in  a  thousand  could  reply  with 
out  a  calculation,  or  consulting  some  authority. 

"  In  England,  gold  is  the  only  legal  tender  for  sums  over  forty  shillings. 
If  you  enter  a  warehouse  in  London,  and  ask  the  price  of  any  number  of 
articles  over  that  sum,  the  salesman  will  inform  you  instantly  ;  but  if  you 
ask  him  how  much  gold  you  shall  weigh  him  for  any  article,  he  cannot 
answer. 

"When  the  English  farmer  asks  fifty  shillings  a  quarter  for  his  wheat, 
does  he  measure  the  value  by  a  mental  reference  to  fifty  shillings,  or  to 
two-and-a-half  sovereigns  in  gold  ?  Or  does  he,  on  the  instant,  think  of 
either  silver  or  gold?  Does  he  think  of  anything  beyond  expressing  a  price  ? 
And  did  he  not,  with  equal  readiness,  give  the  rate  before, the  mint  price 
of  gold  was  fixed  as  at  present?  If,  as  some  say,  the  naming  a  price  is 
strictly  a  comparison  of  the  article  priced  with  its  equivalent  in  the  gold 
standard,  why  is  wheat  continually  quoted  in  shillings,  of  which  there  is 
no  equivalent  in  gold,  instead  of  in  pounds  and  fractions  ?  Why  say  fifty 
shillings,  instead  of  £2  10s.  ?  If  the  process  of  naming  a  price  was  strictly 
a  comparison  with  gold,  the  mind  would  naturally  cling  to  the  pound  or 
sovereign,  and  its  fractions,  especially  where  there  are  equivalents  in  gold, 
and  say  two-and-a-half  sovereigns."  —  Merchant's  Magazine,  April,  1852, 
by  the  author  of  this  volume. 


MONEY    OF    ACCOUNT.  51 

account  and  the  sovereign,  or  gold  bullion.  But  if  the  recent 
influx  of  gold  had  been  accompanied  by  the  fall  in  the  price  of 
that  metal,  which  the  extraordinary  quantity  seemed  to  warrant, 
then  the  confusion  which  must  have  befallen  the  money  system 
of  Great  Britain  would  have  been  disastrous  beyond  estimate  or 
conjecture.  The  evil,  though  alleviated,  is  greater  than  is  now 
suspected.  It  is  strange  that  it  does  not  create  more  apprehen 
sion.  Great  Britain  has  bound  all  her  subjects  to  receive  5  dwts. 
and  3Ags  grains  in  payment  of  a  pound  sterling.  The  immense 
pecuniary  transactions  of  tha-t  country  with  all  the  world  tends 
to  uphold  the  price  of  gold  when  it  exhibits  a  tendency  to  sink. 
The  flow  of  gold  from  all  the  world  to  England  has  been  seen, 
and  the  current  of  silver  from  England  has  not  been  less  visible. 
The  depreciation  must  proceed  to  a  serious  extent  before  its 
effects  become  clearly  revealed  or  appreciated.  The  evil  must, 
by  its  own  nature,  enhance  itself ;  for  the  depreciation  being 
more  clearly  perceived  elsewhere,  the  gold  would  increase  in  its 
flow  to  the  point  of  over-valuation.  Each  step  of  this  deprecia 
tion  would  affect  every  pecuniary  transaction  of  the  country, 
and  constitute  an  attack  on  the  national  money  of  account,  in 
which  all  prices,  rents,  wages,  salaries,  taxes,  and  securities  for 
money,  are  expressed.  The  magnitude  of  such  an  evil  is  wholly 
beyond  estimate.  That  Great  Britain  has  not  already  suffered 
more  from  this  source  is  one  of  the  most  extraordinary  things 
in  the  history  of  commerce ;  for  no  sane  man  would  have  sup 
posed  that  such  an  influx  of  gold  could  take  place,  as  has 
occurred  within  five  years,  without  a  heavy  depreciation.  The 
causes  which  have  delayed  this  depreciation  are,  many  of  them, 
now  well  understood.  Among  them  are  usually  mentioned  as 
prominent,  an  immense  displacement  of  silver  by  the  export  to 
the  East,  caused  in  part  by  revolutionary  movements  in  China ; 
contemplated  rebellion  in  British  India ;  short  crops ;  the  in 
crease  of  enterprise  and  manufacturing  industry  on  the  conti 
nent  of  Europe  ;  together  with  an  immense  absorption  of  capital 
in  the  construction  of  railroads ;  these,  added  to  the  war  with 
Russia,  produced  a  demand  for  gold  which  no  previous  combina 
tion  of  circumstances  ever  equalled. 


52  MONEY    OF    ACCOUNT. 

We  can  scarcely  doubt  that  the  depreciation  of  gold  has  only- 
been  postponed,  and  that  it  cannot  be  avoided,  whether  it  is  to 
take  place  by  a  process  so  slow  as  to  be  perceptible  only  to  those 
who  will  be  shrewd  enough  to  take  full  advantage,  or  whether  it 
occur  so  rapidly  that  none  may  escape  its  consequences.  But 
whether  slow  or  quick,  it  cannot  occur  without  much  evil  to  Great 
Britain  and  the  United  States.  There  is  no  excuse  for  encoun 
tering  such  a  mischief  without  preventive  measures.  The  diffi 
culty  in  providing  a  remedy  is  only  that  which  arises  from  the 
coinage,  and  that  presents  an  obstacle  only  in  reference  to  the 
merest  retail  business.  Great  Britain  has  only  to  adopt  the  same 
principle  and  practice  in  regard  to  gold  that  has  long  prevailed 
in  reference  to  silver.  Let  gold  above  five  sovereigns,  or  some 
other  suitable  amount,  be  a  tender  only  at  the  market  price. 
The  regulation  of  the  United  States,  on  the  occasion  of  the 
great  influx  of  gold,  was  precisely  that  wThich  it  ought  not  to 
have  been.  Gold  should  not  have  been  made  a  legal  tender  in 
sums  above  twenty,  or  thirty,  or  fifty  dollars,  except  at  the 
market  price,  which  will  be  familiar  to  all  when  it  is  permitted 
to  find  its  own  range  like  other  commodities. 

If  this  were  so,  every  fall  of  gold  would  be  at  once  marked 
on  the  money  of  account.  An  ounce  of  gold  would  be  quoted  in 
London  at  £3  17s.  lOJdL,  or  at  £3  17s.  5d.,  <£3  17s.  Qd.,  <£3 
10s.  OcZ.,»c£3  Os.  Od.,  according  to  its  market  price.  Every  con 
tract  for  money  in  the  nation  would  remain  intact,  and  every 
debt  paid  in  gold  would  be  paid  only  at  the  market  price.  The 
sovereigns,  and  other  gold  coins  and  bars,  would  be  public  cer 
tificates  of  the  quantity  and  quality  of  the  gold  in  them,  but 
would  be  received  only  at  their  current  value.  No  confusion  or 
mischief  could  follow  this  repeal,  to  be  compared  with  that  which 
may  be  feared  if  a  heavy  depreciation  in  gold  should  occur. 

The  government,  by  the  adoption  of  the  gold  standard  in 
1816,  the  coinage  of  sovereigns,  and  making  gold  a  legal  tender 
at  a  fixed  rate,  endangered  the  money  of  account,  and  placed  its 
very  existence  on  the  hazard  of  the  value  of  gold  remaining  un 
changed.  No  possible  improvement  in  the  coinage  of  a  country 


.     MONEY    OF    ACCOUNT.  53 

could  compensate  for  the  mischiefs  of  a  ruined  or  confused 
money  of  account.  It  is  true  that  such  mischiefs  have,  in  past 
times,  been  often  inflicted  upon  nations ;  but  the  real  history  of 
these  evils  is  yet  to  be  written,  and  their  magnitude  to  be  appre 
ciated.  New  coins  are  frequently  introduced  with  impunity ; 
and,  great  as  the  evil  of  an  over  multiplication  of  coins  has 
been  in  many  parts  of  the  world,  it  does  not  compare  with  the 
evils  involved  in  an  unsettled  or  broken-down  money  of  account. 

The  period  of  the  suspension  of  specie  payments  by  the  Bank  of  England, 
from  1797  to  1822,  furnishes  a  fit  illustration  of  the  functions  of  a  money  of 
account.  This  period  included  the  wars  of  the  French  Revolution  and  of 
Napoleon,  and  the  three  years  of  war  between  Great  Britain  and  the  United 
States.  The  commercial  payments  of  Great  Britain  were,  during  that  pe 
riod,  effected  almost  entirely  by  means  of  credit:  gold  was  so  much  in 
request  for  military  purposes,  that  it  became  an  article  of  merchandize  in 
constant  demand,  at  a  high  price,  in  England  for  shipment  to  the  continent. 
The  daily  transactions  of  men  involving  the  whole  business  of  the  country, 
the  payment  of  taxes  and  wages,  the  sale  of  goods,  the  whole  move 
ment  of  income  and  expenditure,  and  the  internal  exchanges  of  the  country, 
were  carried  on  by  substitutes  for  money,  or  by  the  various  devices  of  credit. 
During  this  long  period  of  paper  currency,  the  money  of  account  fulfilled 
its  functions  with  a  steadiness  surprising  to  those  who  understood  not  its 
nature.  All  the  contracts  of  Great  Britain  involving  price  and  payment 
were  made  in  the  language  of  the  money  of  account.  For  more  than  a  score 
of  years  it  was  the  medium  of  expressing  the  prices  of  all  commodities,  and 
all  services.  It  was  equally  so  before  1797  and  since  1822 ;  but  when  there 
is  a  currency  of  gold  or  silver,  or  a  paper  currency,  that  is  convertible,  it  is 
difficult  for  many  to  separate  the  office  of  a  money  of  account  from  that  of 
coins.  It  is  so  fixed  in  their  minds,  that  gold  and  silver  are  the  practical 
measures  of  value,  that  there  is  no  place  in  their  conception  for  the  exist 
ence  or  movement  of  a  money  of  account.  It  seems  strange,  however,  that 
any  one,  during  this  period  of  suspension  of  specie  payments  in  Great 
Britain,  could  have  failed  to  see  the  working  of  the  money  of  account.  Gold 
and  silver,  during  all  that  period,  ceased  to  be  employed  as  money  in  large 
transactions:  no  man  sold  his  goods,  or  rendered  his  services,  with  the 
expectation  of  payment  in  coins  or  bullion. 

Few  people  in  Great  Britain,  in  that  day,  knew  the  exact  price  of  gold, 
and  no  one  hesitated  an  instant  in  affixing  his  price  to  other  articles  in 
pounds,  shillings  and  pence.  Nor  did  the  dealer  in  coins  and  bullion  hesi 
tate  in  naming  their  price  in  these  denominations.  During  all  that  period 
it  was  the  sole  medium  of  valuation,  the  sole  medium  of  expressing  or  fixing 
prices.  Business  men,  in  those  days,  did  not  refer  to  the  precious  metals 


54  MONEY    OF    A'C  COUNT. 

in  their  ordinary  transactions.  The  charges  in  their  books  of  account,  and 
the  sums  expressed  in  their  bills  of  exchange  and  promissory  notes,  were 
stated  in  the  money  of  account ;  but  they  were,  neither  by  law  nor  by  cus 
tom,  payable  in  coins  or  bullion.  As  a  matter  of  fact,  the  demand  for  gold 
for  exportation  so  increased  its  value,  that  it  was  sold  at  times  as  high  as 
100  shillings  the  ounce,  instead  of  77  shillings  and  10?  pence,  the  mint 
price.  The  proof  that  this  was  no  depreciation  of  the  paper  currency,  as 
some  contended,  is,  that  the  fluctuations  of  silver  did  not  correspond,  either 
in  time  or  rate,  with  those  of  gold.1 

There  is  no  adequate  proof  that  general  prices  in  England  indicated  any 
depreciation  of  the  paper  of  the  bank.  It  was  never  quoted  as  below  par. 
The  high  price  of  gold  was  the  only  real  ground  for  alleging  a  depreciation 
of  the  paper.  Yet  this  fluctuation  in  the  price  of  gold  had  occurred  fre 
quently  before  the  suspension  by  the  bank  in  1797.2 

It  is  impossible,  then,  to  refuse  to  the  money  of  account  of  Great  Britain 
the  credit  of  having,  during  the  important  period  of  British  history  between 
1797  and  1822,  fulfilled  the  great  office  of  serving  as  the  medium  by  which 
the  people  measured  or  expressed  the  prices  or  values  of  all  commodities 
and  services  in  all  private  and  all  public  transactions.  It  is  equally  true 
that  it  had  done  so  before,  and  has  done  so  ever  since.  During  that  time 
they  were  always  conversant  with  money  of  account,  but  very  little  with 
coins.  It  was  no  more  evident,  however,  during  that  time  than  since,  that 
the  fixing  a  price  and  expressing  it  in  money  of  account  is  one  thing,  and 
payment  is  another  and  quite  a  different  thing. 

In  many  of  the  recent  discussions  in  regard  to  the  adoption 
of  a  decimal  system,  the  importance  of  the  British  money  of 
account  is  not  only  fully  acknowledged,  both  by  writers  and  by 
the  eminent  men  who  were  examined  before  the  Parliamentary 
committee,  but  the  necessity  of  preserving  it  intact  is  strongly 
urged.  Now,  if  thus  important,  where  is  the  treatise  or  work 
in  which  the  nature  and  functions  of  a  money  of  account  are  deve 
loped  ?  Where,  in  what  book,  or  from  what  authority,  are  we 
to  learn  the  doctrines  of  this  very  important  agent  in  commer 
cial  transactions  ? 

1  See  within,  the  closing  paragraphs  in  the  Chapter  on  the  Bank  of  England. 

2  Gold  was  quoted,  at  the  dates  affixed,  as  follows :  — 

1783,   March 8 la.  9d.  per  ounce.    The  mint  price  being  77s.  10}rf. 

1783,   May 82*.  3d.       "  "  "  "         " 

1792,  May  to  Sept 81s.  "  "  "  "        " 

1795-6 85».  86«.  88«.  per  ounce.   «  «  "        « 


MONEY    OF    ACCOUNT.  55 

If  changes  of  temperature  can  be  measured  and  expressed 
by  the  degrees  of  a  thermometer ;  if  the  pressure  of  the  atmo 
sphere  can  be,  in  like  manner,  expressed  by  the  scale  of  a  baro 
meter  ;  if  places  on  the  surface  of  the  earth  can  be  indicated  by 
lines  of  latitude  and  longitude ;  if  men  understand  each  other 
when  they  speak  of  a  foot,  a  yard,  a  pound,  an  ounce,  or  an 
acre ;  and  if  these  modes  of  expressing  temperature,  pressure, 
locality,  length,  weight,  &c.,  can  be  carried  in  men's  minds,  and 
employed  constantly  and  intelligently  to  express  definite  ideas, 
how  is  it  that  we  have  been  so  slow  to  apprehend  that  prices  or 
values  may  be  expressed  in  a  similar  way  ?  How  is  it  that  men 
can  carry  in  their  minds  distinct  and  definite  ideas  of  pounds, 
yards,  feet  and  acres ;  that  they  can  make  estimates,  sales  and 
contracts,  involving  immense  weight  in  pounds,  and  vast  lengths 
in  yards,  and  large  surfaces  in  acres  or  feet,  without  any  appli* 
cation  of  scales  or  yard-sticks,  if  they  cannot  carry  in  their 
minds  definite  ideas  of  pounds,  yards  and  feet  ?  It  would  be  a 
vain  attempt  for  government  to  replace  these  ideal  methods 
for  others  substituted  by  authority.  The  old  thermometers,  baro 
meters,  degrees  of  latitude,  pounds,  yards  and  feet  would  main 
tain  their  empire  over  the  minds  of  men  once  fully  accustomed 
to  them,  for  whole  generations. 

§  4.     Colonial  currency  of  Canada,  and  of  the  thirteen  colonies  now  of  the 

United  States. 

The  continued  existence  of  the  money  of  account  in  the  British  colonies 
of  North  America  furnishes  an  apt  illustration  of  the  nature  and  working 
of  the  ideal  scale  by  which  men  make  computations,  and  express  prices. 
The  money  of  account  is  the  same,  in  terms  or  denominations,  as  that  of 
England,  though  not  the  same  in  meaning.  The  pound  unit  of  Canada  does 
not  express  the  same  value  as  the  pound  sterling.  It  is  not  now,  and  never 
was,  represented  by  any  coin  of  gold  or  silver.  The  people  of  these  British 
colonies  receive  and  pay  out  the  coins  of  England  and  France,  the  United 
States,  and  other  countries,  always  estimating  their  value  or  price  in  their 
own  money  of  account.  They  have  their  own  banking  system,  and  their 
own  bank-notes  issued  in  sums  expressed  in  their  own  money  of  account. 
So,  also,  are  expressed  the  prices  of  all  articles  of  merchandize ;  and  all 
their  domestic  money  transactions  are  effected  in  like  manner.  If  the  tena- 


56  MONEY    OF    ACCOUNT. 

city  of  those  people  for  their  money  of  account  had  not  been  great,  it  could 
not  have  been  maintained  thus  unchanged  for  over  half  a  century  under  the 
circumstances  of  their  intimate  relations  with,  and  dependence  on,  the 
government  of  Great  Britain.  All  the  officers  and  soldiers  of  the  army  who 
go  out  from  the  parent  country,  and  all  the  emigrants,  carry  with  them  their 
habit  of  using  the  British  money  of  account :  there  must  be  incessant  occa 
sion,  throughout  these  colonies,  of  comparing  these  two  moneys  of  account; 
so  much  so,  that  very  many  of  the  people  must  be  as  familiar  with  the 
British  money  of  account  as  their  own.  The  inconvenience  of  this  differ 
ence  must  be  very  great  for  the  British  government  and  its  officials,  as  well 
as  for  the  colonial  governments  and  people.  The  temptation  of  the  Impe 
rial  government  to  make  the  colonial  money  of  account  conform  to  that  of 
Great  Britain  must  be  very  great ;  yet,  in  the  face  of  all  these  circum 
stances,  this  colonial  money  of  account  maintains  its  sway  in  the  habits 
and  minds  of  the  people.  We  are  not  minutely  acquainted  with  its  history. 
The  latest  authority  in  our  hands  gives  its  value  as  one-tenth  less  than  ster 
ling ;  that  is,  £100  colonial  is  equal  to  £90  sterling.  It  would  be  interest 
ing  to  learn  whether  this  colonial  money  of  account  has  undergone  any 
change  within  the  last  fifty  years.  It  is  quite  probable  that  fluctuations 
have  taken  place  in  the  price  of  the  precious  metals  in  these  colonies,  owing 
specially  to  an  unfavorable  exchange  creating  a  demand  for  specie  for  expor 
tation.  Such  occasions,  by  showing  an  increased  price  of  the  coins  in  cir 
culation,  might  to  some  appear  like  a  change  in  the  value  of  the  money  unit; 
whilst,  in  fact,  they  would  only  prove  a  local  demand  for  the  coins  or  bul 
lion,  and  an  enhanced  price.  But  what  it  is  desirable  to  know  is,  whether 
the  Canadian  pound,  or  unit  of  account,  has  undergone  change  in  its  power 
or  value  during  the  last  fifty  years,  as  the  same  is  employed  by  the  mass 
of  the  people. 

British  North  America  furnishes  another  remarkable  instance  of  perse 
vering  adhesion  to  a  money  of  account.  The  French  inhabitants  of  Lower 
Canada  cling  to  the  old  mode  of  computation  which  prevailed  in  France  a 
century  ago,  when  their  ancestors  emigrated  thither.  Despite  their  long 
subjection  to  British  authority,  to  their  being  long  surrounded  by  a  larger 
population  using  another  money  of  account,  they  cling  to  the  denomina 
tions  of  livres,  sous  and  deniers.  This  is  a  continuation  of  the  old  French 
money  of  account,  in  which  the  French  Canadians  yet  express  all  their 
prices,  and  by  which  they  express  the  value  of  all  the  coins  in  circu 
lation. 

The  habits  of  these  Canadians  afford,  then,  plain  proof  that  men 
do  not  measure  the  value  of  goods  by  means  of  gold  or  silver,  or  their 
substitutes,  bank-notes ;  and  that  they  do  it  by  means  of  a  money  of 
account,  which  is  employed  not  only  there,  but  in  all  civilized  countries,  to 
express  the  price  as  well  of  goods  as  of  money  itself.  We  think  it  will  be 


MONET     OF    ACCOUNT.  57 

found  that  the  French  Canadian  money  of  account  has  undergone  no  change 
in  its  power  or  value  for  a  whole  century.1 

At  the  time  of  the  separation  of  the  United  States  from  Great  Britain, 
the  money  of  account  of  all  the  colonies  was  expressed  in  pounds,  shillings 
and  pence;  but  these  terms  had  very  different  significations  in  the  various 
colonies.  The  term  or  unit  pound,  in  the  following  named  colonies,  is  ex 
pressed  as  below  in  our  present  money  of  account.  No  one  of  these  units 
corresponded  to  the  pound  sterling  —  that  of  South  Carolina  being  nearest. 

£1,  New  England  and  Virginia is  equal  to  $3.33,  or  6s.   to  the  dollar. 

"    New  York  and  North  Carolina "  $2.50,  or  8s.       "  " 

"    Pennsylvania  and  Middle  States....  "  $2.66,  or  7s.  &d.  "  " 

"    South  Carolina "  $4.28,  or  4«.8cf.  «  « 

Whoever  will  take  the  trouble  to  trace  the  history  of  these 
various  and  differing  moneys  of  account,  will  find  that  coinage, 
or  the  regulations  of  mints,  had  little  to  do  with  it.  The  variations 
originated  in  part  from  the  same,  and  in  part  from  different 
causes.  Whilst,  in  England  and  France,  and  other  European 
countries,  the  fall  in  the  value  of  the  unit  of  the  money  of 
account  was  caused,  generally  and  mainly,  by  abusive  and  fraudu 
lent  regulations  of  the  coinage,  in  these  colonies  this  departure 
in  various  degrees  from  the  pound  sterling  proceeded  from  the 
monetary  struggles  arising  from  over-importation,  a  consequent 

1  As  a  specimen  of  the  manner  in  which  the  prices  of  various  coins  were  expressed  in 
the  moneys  of  account  of  the  British  Provinces  of  North  America  :  — 

Coins.          Nova  Scotia,  Halifax.     Lower  Canada.         Upper  Canada.         Pr.  Edward's  I. 
£    s.    d.  £     s.    d.  £     s.    d.  £     e.    d. 

British  Guinea 1     3     4  1     3     5  1     5     6  

"       Sovereign...    150  144 1  10  — 

American  Eagle 2  10  — 326 

British  Crown —     56  —     6     0  —     7     6 

"       Shilling —     1     1  —     1     3  —     1     6 

American  Dollar...  —     5     0  —     5     0  —     6     0  —     6     3 

French  Crown —     55  —     56  —  —  —  

"       Five  Franc.  —     47  —     48  

Martin's  British  Colonies,  page  229,  and  Appendix,  page  53. 

The  units  of  the  moneys  of  account  of  some  of  the  British  Islands  are  as  follows  :  — 

Jamaica £1  sterling  equals  £1     S».  or  6s.  8d.  to  the  dollar. 

Barbadoes "  «      £1     7s.  or  6s.  3d.      "  " 

Windward  Islands "  "       £1  15».  or  8«.  3c/.      "  " 

Leeward  Islands "  "      £2     Qa.  or  9s.  Gd.     "  " 


58  MONEY    OP    ACCOUNT. 

long-continued  unfavorable  exchange,  and  from  a  depreciated 
paper  currency.  The  different  circumstances  of  different  colo 
nies  led  to  varying  results ;  but,  when  the  advance  of  indus 
try  and  domestic  trade  had  secured  greater  prosperity,  and 
a  more  settled  policy,  these  various  moneys  of  account  became 
fixed.  There  never  had  been  any  coinage  to  correspond  with, 
or  sustain  any  of  them.  The  coins  in  circulation  were  almost 
exclusively  Spanish;  there  could  be  no  pretence  that  these 
moneys  of  account  corresponded  with  or  represented  any  coins 
or  system  of  coinage,  or  that  they  were  in  the  slightest  degree 
supported  by  coins  or  coinage.  Every  coin  in  circulation  was 
as  much  the  subject  of  price  estimated  in  these  moneys  of 
account,  as  a  bushel  of  wheat,  or  a  barrel  of  flour.  All  prices 
in  each  colony,  and  subsequently  in  each  State,  were  expressed 
in  the  pounds,  shillings  and  pence  of  that  locality.  The  people 
measured  not  values  by  coins,  but  they  expressed  the  known 
value  of  coins  like  other  ascertained  quantities,  by  their  own 
money  of  account.  These  varied  moneys  of  account  were  adhered 
to,  from  mental  habit,  for  thirty  to  fifty  years  after  our  present 
simple  decimal  system  was  adopted.  It  is  no  uncommon  thing 
now,  in  the  interior  of  Virginia  and  Massachusetts,  to  hear 
people  express  prices  in  the  old  money  of  account.  In  New 
York  the  term  shilling  prevails  yet,  as  it  agrees  with  the  Spanish 
subdivision  of  the  dollar  adopted  as  the  unit  of  our  national 
money  of  account.  It  was  a  common  practice  for  merchants, 
for  twenty  years  after  the  adoption  of  the  dollar  unit,  to  keep 
their  books  in  the  pounds,  shillings  and  pence,  with  blank 
columns,  in  which,  at  their  leisure,  they  converted  their  first 
entries  into  dollars  and  cents.  For  though  merchants  and  pro 
fessed  accountants  became  familiar  with  dollars  and  cents, 
they  were  obliged  to  deal  with  the  people  in  pounds,  shillings 
and  pence.  It  is  true  the  value  of  the  dollar  was  well  known  to  the 
men  of  that  day,  but  it  was  known  only  as  the  value  of  other 
things ;  it  had  no  place  in  the  minds  of  the  people  as  the  unit 
of  a  money  of  account.  For  them,  prices  expressed  in  dollars 
would  have  to  be  converted  into  pounds,  shillings  and  pence. 
In  the  latter  terms  they  instantly  understood  prices  in  all  their 


MONEY     OF    ACCOUNT.  59 

relations ;  but  prices  expressed  in  dollars,  or  in  sterling  money, 
involved  a  calculation.  Notwithstanding  the  simplicity  of  the 
dollar  unit,  and  the  extreme  inconvenience  of  the  differing 
moneys  of  account  in  the  different  States,  seventy  years,  or  two 
generations,  have  passed  since  the  change  was  made,  and  yet 
traces  of  the  old  habits  of  reckoning  are  to  be  met  with  in 
all  the  old  States.  If  any  man  finds  himself  unable  to  compre 
hend  the  working  of  a  money  of  account,  and  its  firm  hold  on 
the  minds  of  people,  let  him  study  these  moneys  of  account  of 
the  Atlantic  States  of  North  America. 

|  5.  Moneys  of  account  in  Italy,  Germany,  &c. —  Evils  of  varied 
coinage  —  Coinage  implies  a  previous  price  —  Coins  not  a  measure  — 
Prices  in  money  of  account  understood  instantaneously — Ricardo — Sir 
James  Stewart  —  Bishop  Berkeley  —  Montesquieu  —  Money  of  account  to 
le  taken  as  it  is,  and  its  limits  of  usefulness  studied  —  Edinburgh 
Review. 

We  have  abstained  from  entering  at  large  into  any  notice  of  the  moneys 
of  account  of  various  European  countries,  which,  though  full  of  instruction, 
are  so  complicated  with  questions  of  banking  and  coinage  as  to  be  less 
easily  understood.  The  small  extent  of  the  separate  countries  of  Germany 
and  Italy,  and  the  consequent  multiplication  of  contiguous  mints  and  varied 
coinage,  and  the  blending  in  the  circulation  of  so  many  different  coins, 
early  begot  an  amount  of  vexation  and  loss  in  money  transactions,  which 
people  only  bore  because  a  remedy  seemed  hopeless.  The  evil,  instead  of 
diminishing,  only  increased  with  the  lapse  of  time  ;  for  every  effort  of 
reform,  and  every  application  of  remedy,  only  enhanced  the  mischief.  It 
is  easy  to  see,  however,  through  the  endless  mazes  of  this  varied  coinage, 
that  the  evil  would  have  been  insufferable  but  for  the  facility  afforded  by 
moneys  of  account  in  valuing  and  computing  the  numberless  coins  which 
went  to  make  up  the  circulation  in  many  parts  of  Europe.  It  is  true  that 
this  facility  was  somewhat  diminished  by  the  formation,  in  many  countries, 
of  several  different  moneys  of  account.  Some  coins  were  computed  in  one 
money  of  account,  and  some  in  another.  In  some  countries  one  money  of 
account  was  appropriated  to  bills  of  exchange,  and  another  was  used  in  the 
bank  accounts. 

People  who  were  flooded  with  such  a  varied  coinage  as  that 
which  prevails  in  Germany  and  Italy,  were  often  reduced  to  the 
patriarchal  mode  of  making  payments  by  aid  of  the  scales.  The 
method  subsequently  adopted  to  escape  these  evils  was  to  pub- 


60  MONEY    OF    ACCOUNT. 

lish  tables  of  the  various  coins  in  circulation,  with  their  value  in 
the  most  used  money  of  account  of  the  country  where  the  table 
was  constructed.  Such  a  table  is  that  made  by  Sir  Isaac  New 
ton  in  1719,  a  copy  of  which  is  found  in  the  second  volume  of 
Kelly's  Cambist  (page  154) ;  several  such  tables,  of  recent 
date,  are  found  in  the  same  volume,  in  the  pages  succeeding. 
These  statements  show  that  there  were  thirty  gold  coins  called 
ducats,  some  twenty-five  of  which  were  from  different  mints, 
writh  wholly  different  impressions,  and  scarcely  any  two  of  which 
were  x)f  the  same  value.  There  were  twenty-three  gold  coins 
called  pistoles,  from  nineteen  different  mints,  of  differing  values 
and  impressions.  No  less  than  fifty-one  silver  coins,  called  rix 
dollars,  were  in  circulation  from  about  twenty  different  mints, 
and  of  varying  value.  We  might  adduce  many  such  cases,  to 
show  how  very  complicated  and  vexatious  is  the  general  coin 
age  of  Europe.  But  the  real  extent  of  the  evil  cannot  be  conjec 
tured  from  such  instances,  even  if  we  had  space  to  continue 
them.  To  know  these  coins,  and  deal  in  them,  becomes  a  special 
branch  of  the  business  of  private  bankers,  who  of  course  must 
have  a  compensation  for  their  skill  and  trouble.  Many  of  the 
continental  public  banks  had  their  origin  mainly  in  this  difficulty. 
To  scrutinize,  count  and  pay  over  these  coins  became  such  a  bur 
den,  that  it  was  assigned  as  among  the  chief  reasons  for  the 
establishment  of  the  banks  of  Amsterdam  and  Hamburg.  Those 
who  carefully  examine  the  mode  of  proceeding  by  merchants  and 
bankers  through  all  this  labyrinth  of  moneys,  will  find  that  it 
was  only  mastered  by  the  mental  habit  of  subjecting  all  these 
coins  to  the  valuation  of  one  or  more  moneys  of  account.  It  is 
no  great  difficulty  for  men  much  accustomed  to  deal  in  money  to 
master  several  different  moneys  of  account,  and  employ  them 
mentally  with  equal  facility.  There  are  many  men  who,  from 
their  peculiar  position  in  business,  can  apply  with  equal  readi 
ness  the  moneys  of  account  of  England,  France  and  the  United 
States.  Time  and  opportunity  may  give  this  facility  to  any  per 
son  ;  but,  unaccustomed  to  other  moneys  of  account  than  their 
own,  the  most  expert  arithmeticians  of  either  of  these  countries 
will  always  be  found  converting  the  money  of  both  the  others 


MONEY    OP    ACCOUNT.  61 

into  their  own,  as  a  means  of  ascertaining  its  meaning  or  value. 
An  Englishman,  simple  as  the  French  system  is,  always  men 
tally  converts  every  sum  and  price  named  to  him  in  France  into  his 
complicated  denominations  of  pounds,  shillings  and  pence,  before 
it  presents  to  his  mind  a  full  idea  of  the  value  expressed.  So, 
indeed,  must  the  traveller  from  France  do  in  the  United  States, 
although  familiar  with  a  decimal  system  similar  to  our  own.  The 
price  of  a  horse,  or  a  coat,  in  dollars  does  not  instantly  convey 
to  his  mind  the  value  named ;  it  must  be  turned  into  francs. 

All  modern  coinage  implies  some  previous  mode  of  expressing 
value  or  prices.  It  will  be  seen  that  the  coins  are  always  made 
to  correspond  with  the  denominations  of  this  mode  of  expression. 
"When  the  English  sovereign  was  first  coined  in  1816,  it  was 
made  to  contain  so  much  gold  as  was  equivalent  to  a  pound  ster 
ling.  And  so  it  will  be  found  that  coins  are  always  made  to 
correspond  not  specially  with  a  previous  weight  or  coin,  but 
always  with  the  money  of  account.  This  will  be  shown  more 
fully  hereafter.  Coinage,  as  now  conducted  at  modern  mints, 
is  not  only  in  accordance  with  the  prevailing  money  of  account, 
but  subservient  to  it.  A  certain  weight  of  gold  or  silver  has  its 
price  expressed  in  some  particular  denomination  of  the  money  of 
account.  Three  things  are  expressed  in  a  coin,  weight,  quality, 
and  price  or  value.  Its  weight  is  ascertained  by  actual  applica 
tion  of  the  balance  in  the  mint ;  its  quality,  or  standard  of  fine 
ness,  is  also  fixed  by  law  and  the  workmanship  of  the  mint ;  its 
price  is  also  fixed  by  law  before  it  is  coined.  It  is  made  to  corre 
spond  to  some  previous  rule  in  all  these  respects.  It  is  not, 
therefore,  a  measure  or  criterion  of  value ;  but  an  article  pre 
pared  by  the  mint,  and  vouched  by  the  public  authorities  as  of  a 
proper  weight  and  quality  to  be  employed  in  payment  at  a  par 
ticular  price.  It  is  a  commodity  commonly  used  in  payment, 
and  approved  for  that  purpose,  which  is  brought  to  one  common 
standard  of  quality,  and  divided  into  pieces  accurately  weighed, 
and  of  such  size  and  weight  as  will  be  convenient  for  use,  reckon 
ing  and  circulation.  If  these  coins  were  in  occasional  use  among 
savages  for  the  purposes  of  exchange,  they  would  probably  com 
pare  every  article  with  the  coin,  and  among  them  coins  would  bo 


62  MONEY    OF    ACCOUNT. 

a  kind  of  measure  of  value.  In  civilized  life,  coins  are  not  mea 
sures  of  value,  but  special  quantities  of  gold  or  silver  weighed, 
certified  by  the  impression  received  at  the  mint,  and  adjusted 
by  the  weight  given  to  them  to  a  particular  price  expressed  in 
the  money  of  account.  The  gold  and  silver  thus  prepared  has 
given  to  it  every  possible  advantage  as  a  medium  of  payment. 
As  a  general  equivalent,  no  commodity  has  ever  been  preferred, 
and  none  is  likely  to  be  preferred.  We  therefore  count  coins, 
we  pay  in  coins,  but  we  do  not  express  prices  nor  keep  books  in 
coins.1  All  our  computations  of  money,  all  our  conversation 
about  the  market  value  of  merchandize,  all  the  sums  named  in 
reference  to  real  estate  or  public  revenue,  all  the  sums  expressed 
in  bills  of  exchange  —  all  these,  as  we  have  said,  are  stated  in 
money  of  account.  If  one  person  say  to  another,  I  will  give 
you  $10,000  for  your  house,  he  to  whom  the  offer  is  made 
knows  instantly  the  import  of  the  offer ;  but  if,  instead  of  this, 
he  places  before  him  a  large  cask  of  dollars,  and  says,  I  will 
give  you  these,  it  may  require  two  or  three  days'  time  to  ascer 
tain  how  much  is  offered.  So  any  one  understands,  in  an 
instant,  what  value  is  intended  by  $100 ;  but  it  may  require 
many  minutes  to  count  and  scrutinize  §100  in  coins.  In  analogy 
with  the  mental  process  which  is  applied  to  all  measures  and 
weights  when  they  are  merely  spoken  of  and  not  actually  used,  men 
employ  a  money  of  account  to  express  prices.  It  is  only  arith 
metic,  with  a  value  affixed  to  the  unit  or  number  one,  which  is  to 

1  "A  coin  is  merely  a  piece  of  metal,  of  known  weight  and  fineness." — 
"  It  has  been  said  to  be  both  a  sign  and  measure  of  value ;  in  truth,  it  is 
neither."  —  "  It  is  equally  incorrect  to  call  money  a  measure  of  value.  Gold 
and  silver  do  not  measure  the  value  of  commodities  more  than  the  latter 
measure  the  value  of  gold  and  silver.  When  one  commodity  is  exchanged 
for  another,  each  measures  the  value  of  the  other."  —  Encycl.  Britt.,  article 
"Money,"  by  J.  R.  M'Cullocli. 

Mr.  M'Culloch  and  others  have  thus  clearly  taken  away  the  old  mea 
sure,  without  bringing  forward  the  real  agent  in  fixing  prices.  It  is  money 
of  account  which  makes  of  the  exchanges  of  civilized  people  a  real  barter ; 
it  registers  prices  and  amounts,  and  the  credit  system  effects  the  pay 
ments.  Commodity,  in  fact,  pays  for  commodity.  This  is  explained  as  we 
advance. 


MONEY    OF    ACCOUNT.  63 

accompany  all  subsequent  numbers  and  combinations  in  propor 
tion  to  the  number  of  units  expressed.  Fractions  and  decimal 
parts  are  expressed  as  in  all  other  cases. 

"  During  the  discussion  of  the  bullion  question,"  says  Mr. 
Kicardo,  "  it  was  most  justly  contended,  that  a  currency,  to  be 
perfect,  should  be  absolutely  invariable  in  value." 

"  But  it  was  said,  too,  that  ours  had  become  such  a  currency 
by  the  bank  restriction  bill ;  for  by  that  we  had  wisely  discarded 
gold  and  silver  as  the  standard  of  our  money ;  and,  in  fact,  that 
a  one  pound  note  did  not  and  ought  not  to  vary  with  a  given 
quantity  of  gold  more  than  with  a  given  quantity  of  any  other 
commodity.  This  idea  of  a  currency  without  a  specific  standard 
was,  I  believe,  first  advanced  by  Sir  James  Stewart ;  but  no  one 
has  been  able  to  offer  any  test  by  which  we  could  ascertain  the 
uniformity  in  the  value  of  a  money  so  constituted." ] 

This  shows  that  even  Mr.  Kicardo,  who  must  have  known  what 
was  meant  by  a  money  of  account,  could  not  embrace  its  func 
tions  in  his  view  of  money  in  general.  Sir  James  Stewart,  in 
whose  works  we  first  find  distinctly  set  forth  the  existence  and 
uses  of  a  money  of  account,  did  not  speak  of  it  nor  propose  it  as 
a  currency ;  he  did  not  regard  it  as  money.  We  give  his  own 
words :  — 

"  Money  which  I  call  of  account  is  no  more  than  a  scale  of  equal  parts, 
invented  for  measuring  the  respective  value  of  things  vendible. 

"  Money  of  account  is,  therefore,  quite  a  different  thing  from  money  coin, 
and  might  exist  although  there  was  no  such  thing  in  the  world  as  any  sub 
stance  which  could  become  an  adequate  and  proportional  equivalent  for 
every  commodity. 

"  Money  of  account  performs  the  same  office,  with  regard  to  the  value  of 
things,  that  degrees,  minutes,  seconds,  &c.,  do  with  regard  to  angles,  or  as 
scales  do  to  geographical  maps,  or  to  plans  of  any  kind. 

"  In  all  these  inventions  there  is  some  denominative  taken  for  the  unit. 

"  In  angles  it  is  the  degree  ;  in  geography  it  is  the  mile ;  in  plans,  foot, 
yard ;  in  money  it  is  the  pound,  livre,  florin,  &c. 

"  The  degree  has  no  determinate  length,  so  neither  has  that  part  of  the 
scale  upon  plans  or  maps  which  marks  the  unit ;  the  usefulness  of  all  those 
being  solely  confined  to  the  marking  of  proportions. 

1  Proposals  for  an  Economical  and  Secure  Currency,  Section  II. 


34  MONEY    OF    ACCOUNT. 

"Just  so,  the  unit  in  money  can  have  no  invariable  determinate  propor 
tion  to  any  part  of  value ;  that  is  to  say,  it  cannot  be  fixed  in  perpetuity  to 
any  particular  quantity  of  gold  or  silver,  or  any  other  commodity. 

"  The  value  of  commodities  depending  upon  circumstances  relative  to 
themselves,  their  value  ought  to  be  considered  as  changing  with  respect  to 
one  another  only ;  consequently,  anything  which  troubles  or  perplexes  the 
ascertaining  these  changes  of  proportion  by  the  means  of  a  general  deter 
minate  and  invariable  scale,  must  be  hurtful  to  trade ;  and  this  is  the  infal 
lible  consequence  of  every  vice  in  the  policy  of  money  or  coin. 

"  Money,  as  has  been  said,  is  an  ideal  scale  of  equal  parts.  If  it  be  de 
manded,  what  ought  to  be  the  standard  value  of  one  part?  I  answer  by 
putting  another  question :  what  is  the  standard  length  of  a  degree,  a  minute, 
or  a  second?  None  ;  and  there  is  no  necessity  of  any  other  than  what,  by 
convention,  mankind  think  fit  to  give. 

"  The  first  step  being  perfectly  arbitrary,  people  may  adjust  one  or  more 
of  those  parts  to  a  precise  quantity  of  the  precious  metals  ;  and  so  soon  as 
this  is  done,  and  that  money  becomes  realized,  as  it  were,  in  gold  and  silver, 
then  it  acquires  a  new  definition ;  it  then  becomes  the  price,  as  well  as  the 
measure  of  value. 

"  It  does  not  follow,  from  this  adjusting  of  the  metals  to  the  scale  of  value, 
that  they  themselves  should  therefore  become  the  scale." 

Sir  James  Stewart  then  refers  to  the  bank  money  of  Amsterdam,  and 
the  African  custom,  mentioned  by  Montesquieu,  as  perfect  exemplifica 
tions  of  a  money  of  account.  "A  florin  banco  has  a  more  determinate  value 
than  a  pound  of  fine  gold  or  silver;  this  bank  money  stands  invariable  like 
a  rock  in  the  sea." — Sir  James  Stewart's  Political  Economy,  B.  3,  cli.  1,  vol. 
i.,  4th  ed.,  p.  526. 

Now,  whatever  may  be  the  imperfections  of  this  statement,  by  Sir  James 
Stewart,  of  the  nature  of  a  money  of  account,  Mr.  Ricardo  should  have  seen 
that  he  did  not  propose  "  a  currency  without  a  specific  standard."  He  did 
not  propose  a  currency  of  any  kind ;  for  a  currency  is  something  which 
passes  as  a  medium  of  exchange,  and  a  money  of  account  is  something 
which  every  one  must  carry  in  his  mind  as  he  does  his  knowledge  of  words 
and  arithmetic. 

"It  has  long  been  obvious  to  observing  men  that  there  was  something 
more  in  the  nature  and  functions  of  money  than  was  exhibited  in  the  mere 
coinage  of  the  precious  metals,  and  that  many  false  measures  and  notions 
were  prevalent  in  consequence.  To  some  it  appeared  clear  that  any  sub 
stance  whatever  might  serve  for  money,  if  men  were  only  agreed  to  receive 
it  as  such.  Hence,  probably,  the  Carthaginian  attempt  at  money  of  leather, 
and  the  Chinese  paper-money.  Those  who  saw  clearly  that  money  per 
formed  a  certain  circle  of  operations,  returning  to  perform  them  again  and 
again,  were  struck  with  the  constantly  repeated  routine  in  which  money 


MONEY    OF    ACCOUNT.  65 

appeared  to  circulate.  This  subject  was  occasionally  adverted  to  long 
before  it  was  ever  seriously  taken  up.  Bishop  Berkeley,  in  his  'Querist/ 
was  one  of  those  who  first  intimated  the  distinction  between  money  and 
money  of  account.  In  his  23d  query  he  asks :  '  Whether  money  is  to  be 
considered  as  having  an  intrinsic  value,  or  as  being  a  commodity,  a  standard, 
a  measure,  or  a  pledge,  as  is  variously  suggested  by  writers?  And  whether 
the  true  idea  of  money,  as  such,  be  not  altogether  of  a  ticket  or  counter?' 
Query  25  :  '  Whether  the  terms  crown,  livre,  pound  sterling,  &c.,  are  not 
to  be  considered  as  exponents  or  denominations'  (see,  also,  the  24th  query); 
'and  whether  gold,  silver  and  paper  are  not  tickets  or  counters  for  reckon 
ing/  &c.  Query  26:  'Whether  the  denominations  being  retained,  although 
the  bullion  were  gone,  things  might  not,  nevertheless,  be  rated,  bought  and 
sold,  industry  promoted,  and  a  circulation  of  commerce  maintained?'  Query 
35 :  '  Whether  power  to  command  the  industry  of  others  be  not  real  wealth  ? 
and  whether  money  be  not,  in  truth,  tickets  or  tokens  for  conveying  and 
recording  such  power,  and  whether  it  be  of  great  consequence  what  mate 
rials  the  tickets  are  made  of?' 

"  It  is  evident  the  Bishop  saw  dimly  the  value  and  functions  of  a  money 
of  account,  but  that  he  did  not  perceive  the  nature  and  use  of  a  coinage,  or 
the  importance  of  the  precious  metals  as  a  universal  equivalent.  Thus  it  is, 
that  while  some  have  looked  at  the  money  of  account,  they  lose  sight  of  the 
importance  of  coins,  or  the  regular  mode  of  authenticating  the  pieces  of 
gold  and  silver,  which  are  used  sometimes  for  payment ;  whilst  those  who 
regard  the  latter  too  narrowly,  are  not  able  to  comprehend  that  money  of 
account  in  which  all  men  name  their  prices,  and  keep  their  accounts. 

"  Montesquieu,  in  the  3d  chapter  of  the  22d  book  of  the  '  Spirit  of  Laws,' 
treats  expressly  of  ideal  money :  '  There  are  real  and  ideal  moneys :  civil 
ized  people,  who  all  use  ideal  money,  do  so  because  they  have  converted 
their  real  into  ideal  money.  Those  who  at  first  had  a  real  money  find  that 
by  fraud,  or  by  act  of  the  government,  a  part  of  the  metal  which  should  be 
'contained  in  a  coin  is  withheld,  abstracted,  and  the  piece  thus  reduced  is 
still  called  by  its  former  name.'  He  saw  clearly  that  men  reckoned  by  a 
money  of  account,  but  imagined  it  was  only  because  the  coin  had  been 
altered.  The  truth  is,  however,  that  the  temptation  to  alter  the  coin  arose, 
as  we  shall  explain,  from  the  fact  that  a  gain  could  be  made  by  using  the 
terms  of  the  money  of  account  to  keep  up  the  deception  of  the  debased  coin. 
That  which  was  called  a  shilling,  was  still  called  a  shilling,  although  re 
duced  in  quantity  and  value ;  but  the  idea  of  the  value  of  a  shilling  being 
firmly  fixed  in  the  minds  of  the  many  would  be  applied,  by  reason  of  the 
name,  to  the  debased  coin.  And  the  evil  of  these  changes  induces  the  author 
of  the  '  Spirit  of  Laws'  to  discourage  the  use  of  ideal  money.  In  the  8th 
chapter  of  the  same  book  he  tells  us,  that  '  the  blacks  on  the  coast  of 
Africa  have  a  sign  of  value  without  money,  purely  ideal.  A  certain  article 
is  worth  three  macutes,  another  six,  another  ten  macutes.  That  is  the  same 

5 


66  MONEY    OF    ACCOUNT. 

as  if  they  said  simply  3,  6,  10.  The  price  is  fixed  and  expressed  by  com 
parison  of  commodity  with  commodity,  for  there  is  no  money  in  particular, 
but  every  portion  of  goods  is  money,  or  means  of  payment,  compared  with 
others.7"  —  From  an  article,  by  the  author  of  this  volume,  in  the  "Bankers' 
Magazine,"  of  July,  1857. 

The  power  and  functions  of  a  money  of  account  are  of  great 
importance ;  but  we  must  take  the  money  of  account  for  what 
it  is,  and  for  nothing  else.  We  may  trace  its  history,  study  its 
applications,  and  consider  its  range  of  power  and  usefulness ; 
but  we  cannot  deny  its  existence,  nor  shut  our  eyes  to  the  fact 
that  its  use  is  as  universal,  as  it  is  unavoidable,  among  all  civilized 
people.  It  is  a  very  proper  and  natural  inquiry  how  far  a 
money  of  account  may  be  relied  upon  for  uniformity  and  perma 
nence.  Since  men  will  estimate  and  count  by  an  ideal  scale, 
it  becomes  important  to  learn  all  that  can  be  known  of  this  im 
portant  mental  process.  What  are  its  advantages  and  disadvan 
tages  ?  Does  the  unit  of  the  money  of  account  vary  under  slight, 
or  only  under  extraordinary  influences  ?  What  kind  of  influences 
seem  most  to  affect  it  ?  These,  and  other  like  questions,  may 
Avell  demand  consideration  ;  but  no  one  can  any  more  be  held 
responsible  for  the  defects  of  a  money  of  account,  than  can  any 
one  claim  merit  for  it  as  an  invention  of  his  own.  Sir  James 
Stewart  was  not  the  inventor  of  that  which  had  been  in  use  in 
all  ages ;  and  it  was  not  incumbent  on  him  "  to  offer  any  test 
by  which  could  be  ascertained  the  uniformity  in  the  value  of  a 
money  so  constituted."  Few  men  were  better  fitted  to  judge  of 
the  uniformity  of  a  money  of  account  than  Mr.  Ricardo,  if  he 
had  applied  himself  to  that  particular  point. x 

1  "  It  is  clearly  necessary,  therefore,  to  have  a  mode  of  expressing 
values,  which  is  as  applicable  to  every  change  in  the  value  of  the  precious 
metals  as  to  any  other  commodity.  This  is  what  they  have  in  China,  and 
what  they  had  in  Venice,  and  what  they  have  in  Hamburg,  and  in  every 
commercial  community,  where  their  coins  do  not  correspond  with  the  money 
of  account.  It  is  what  they  have  even  where  this  correspondence  exists, 
but  with  such  confusion  of  ideas  as  greatly  impairs  the  advantage.  Mer 
chants,  bankers  and  capitalists  can  readily  apply  the  usual  money  of  account 
to  bullion ;  and  the  price-currents  give  constantly  the  price  of  gold  and  sil 
ver  in  bars  by  the  ounce,  and  of  doubloons  and  dollars.  But  the  mass  of 


MONEY    OF    ACCOUNT.  67 

|  6.     Moneys  of  account,  Iww  formed,  preserved,  disturbed  and  destroyed. 

The  agency  of  moneys  of  account  being  acknowledged,  it  be 
comes  a  matter  of  interest  to  consider  how  they  are  formed,  pre 
served  inviolate,  and  disturbed  or  destroyed.  Hitherto,  whilst 

the  people  are  prone,  in  Great  Britain,  to  look  upon  the  precious  metals, 
and  pounds  and  shillings,  as  the  same  thing.  It  is,  however,  none  the  less 
true,  that  the  course  of  dealing  converts  any  system  of  coinage  into  a  money 
of  account  used  in  all  the  price-lists,  and  in  all  sales.  Men  familiar  with 
prices  soon  learn  to  carry  the  prices  of  hundreds  of  articles  in  their  memo 
ries,  with  all  the  fluctuations  that  are  constantly  taking  place ;  and  this 
they  do  not  accomplish  by  keeping  in  their  minds  a  distinct  idea  of  the 
quantity  of  gold  or  silver  which  may  be  the  equivalent  of  each  price,  for  of 
these  quantities  they  may  have  no  correct  conception  at  all.  However  it 
may  be  done,  whether  by  mere  force  of  memory  or  practice,  or  by  the  aid 
of  association,  it  is  true  that  men  in  business  carry  a  vast  amount  of  details 
about  prices  in  their  minds,  who  know  very  little  of  anything  about  gold 
and  silver  coins  or  bullion.  It  is,  hence,  always  the  tendency  of  commerce 
to  create  a  strict  money  of  account,  especially  among  those  who  have  most 
to  do  with  trade,  and  most  familiarity  with  prices.  This  would  be  at  once 
seen  and  credited,  were  no  coins  circulated ;  but  it  is  no  less  true  where  it 
cannot  readily  be  detected,  than  where  it  is  evident  in  the  business  of  every 
day.  The  occasions  in  which  prices  are  named,  discussed  and  fixed,  are 
vastly  more  numerous  than  those  in  which  any  actual  or  veritable  measure 
ment  of  the  value  of  any  article  is  made  in  gold  or  silver;  so  much  more 
so,  that  those  whose  occupations  lead  them  incessantly  to  the  consideration 
of  prices,  find  it  much  easier  to  carry  money  of  account  in  their  heads  than 
money  of  coins  in  their  hands. 

"  Mr.  Locke  has  said,  men  do  not  contract  for  denominations,  not  having 
noted  that  they  contract  by  them;  and  the  writer  of  an  article  in  the  'Edin 
burgh  Review'  for  October,  1808,  says  that  'Abstract  ideas  are  of  no  use  in. 
going  to  market.'  Mr.  Locke  has  been  frequently  refuted  and  contradicted 
in  reference  to  some  of  his  positions  about  money;  and  the  author  of  the 
article  in  the  '  Review'  has  been  handled  with  masterly  severity  and  power 
by  the  writer  of  the  book  reviewed.1  The  author  of  the  '  Review'  has  used 
this  flippant  expression  as  an  argument ;  and  it  is  clear  enough,  from  a 
survey  of  the  entire  article,  that  his  conceptions  and  practical  knowledge 
of  the  whole  subject  were  far  too  confused  to  enable  him  to  escape  from 
fallacies  even  as  glaring  as  that.  lie  quotes  with  equal  readiness  to  support 

1  "  Essay  on  Money  and  Exchange,"  by  Thomas  Smith,  Svo.  page  231 :  London, 
1807.  "The  Bullion  Question  Impartially  Discussed:  an  Address  to  the  Editors  of 
Ed.  Review,"  by  Thomas  Smith:  London,  1812. 


68  MONEY    OF    ACCOUNT. 

the  subjects  of  money,  coinage,  coins,  the  precious  metals,  cur 
rency,  and  banking,  have  been  treated  at  great  length,  but  little 
attention  has  been  given  to  moneys  of  account,  and  still  less  to 

his  positions,  that  which  is  directly  against,  as  that  which  sustains  them. 
He  neither  comprehends  the  work  reviewed,  nor  the  authors  whose  works 
he  quotes.  This  is  not  for  want  of  ability,  but  for  want  of  sufficient  previous 
knowledge  of  commerce  and  the  use  of  money.  He  would  have  found  it 
very  difficult  to  give  a  philosophical  reply  to  the  question,  With  what  kind 
of  money  did  Englishmen  pay  their  debts  from  1797  to  1822,  during  the 
period  of  suspension?  His  position,  that  'nothing  can  measure  value  but 
value  itself/  would  hardly  be  a  satisfactory  response.  He  could  not  fairly 
rid  himself  of  the  interrogatory,  as  he  does  of  the  African  custom  of  reckon 
ing,  by  an  imaginary  standard  of  bars  (originating  from  bars  of  iron); 
'  When  the  Africans  estimate  the  value  of  a  purchase  in  bars  of  iron,  they 
have  not,  in  general,  the  bars  to  give  for  it ;  they  have  only  some  other  kind 
of  goods,  and  their  purchases  and  sales  are  mere  barter,  though  they  esti 
mate  the  value  of  the  commodities  given  and  received  by  comparing  them 
with  bars  of  iron.  When  the  Europeans,  however,  make  their  estimates  by 
comparison  with  ascertained  quantities  of  gold  and  silver,  they  have  the  gold 
and  silver  ready  to  give  for  the  commodity  which  is  the  object  of  the  pur 
chase.'  This  was  a  monstrous  assumption  for  an  Englishman  to  make  in 
1808,  even  for  the  sake  of  argument.  That  it  was  done  in  pure  simplicity 
is  evident  from  the  following  sentence  :  '  The  convenience  of  this  is  very 
great/  Notwithstanding  this  convenience,  it  is  probable  that  not  one  pound 
sterling  in  one  thousand  of  this  convenience  was  used  in  payment  for  com 
modities  during  the  quarter  of  a  century  of  suspension.  And  from  1822  to 
this  day,  but  a  very  small  proportion  of  such  payments  have  been  made  in 
the  convenient  shape  of  coins.  What,  then,  did  Englishmen  use  to  make 
their  purchases?  A  more  intimate  knowledge  of  the  laws  of  trade  would 
have  taught  the  reviewer,  that  the  transactions  of  English  commerce  might 
be  resolved  into  barter  as  justly  as  those  of  Africa.  He  would  have  found 
it  difficult  to  explain,  on  his  principles,  why  counterfeit  coins  and  notes  are 
just  as  efficient  and  convenient,  until  discovered,  as  the  genuine;  the  whole 
loss  falling  upon  those  in  whose  hands  they  are  detected,  although  pur 
chases  may  have  been  made  with  them  to  thousands  of  times  their  nominal 
value.  The  mind  of  the  reviewer  was  thrown  into  a  perfect  chaos,  by 
assuming  that  what  Mr.  Smith  called  a  standard  unit  of  the  money  of 
account  was  meant  as  a  standard  of  value.  He  floundered  in  this  misunder 
standing,  without  reaching  a  single  clear  conception  of  the  subject  strictly 
under  review.  Money  of  account  is  not  a  standard  of  value,  it  is  an  expres 
sion  of  value  or  price ;  by  aid  of  arithmetic  and  men's  mental  faculties,  it 
becomes,  so  long  as  undisturbed,  the  surest  and  most  reliable  expression 
of  prices  or  values.  There  can  be  no  standard  of  value  in  tho  sense  in 


MONEY    OF    ACCOUNT.  69 

the  manner  of  their  formation,  preservation  and  destruction. 
We  cannot  leave  the  subject  without  adverting  to  these  topics. 

From  what  we  have  presented  to  the  reader,  it  will  have  been 
seen  that  when  any  special  coin,  or  weight  of  gold  or  silver,  or 
any  other  article  of  value,  has  been  employed  for  a  time  as  an 
equivalent,  or  in  payment  for  things  purchased,  people  assume 
the  value  of  the  article  in  question  as  the  unit  of  a  money  of 
account,  and  employ  it,  with  the  aid  of  arithmetic,  to  express 
prices.  The  more  active  the  dealings  of  a  people,  the  quicker 
they  fix  in  their  minds  the  unit  from  which  proceeds  a  money  of 
account.  This  is  fastened  upon  the  minds  of  the  masses  by  inces 
sant  use ;  few  habits,  mental  or  bodily,  are  more  constantly  in 
use  than  the  fixing  and  expression  of  prices.  This  unit  of  the 
money  of  account  becomes  familiar  to  every  one;  and  being 

which  the  term  is  sometimes  employed;  the  right  use  of  the  term,  as  applied 
to  the  precious  metals,  is  the  standard  of  coinage." — Article  in  the  "Banker's 
Magazine,"  by  the  author  of  this  volume,  July,  1857. 

The  examination  of  this  subject  was  not  without  profit  to  the  reviewer, 
lie  took  up  his  pen  to  ridicule  and  crush  Mr.  Smith,  and  his  idea  of  a  money 
of  account.  He  did  not  spare  any  weapon  used  by  reviewers ;  and  after 
having,  as  he  complacently  supposed^  destroyed  all  Mr  Smith's  claims,  he 
very  coolly  puts  forth  the  very  opinion  the  review  is  written  to  controvert. 
He  ridiculed  Mr.  Smith  out  of  his  shoes,  and  deliberately  and  gravely  steps 
into  them,  and  thus  delivers  himself  to  his  readers :  — 

"  Next  we  account,  by  means  of  money.  Now,  what  is  the  operation  of 
accounting?  We  first  state,  in  denominations  of  money,  the  value  of  any 
article,  or  accumulation  of  articles;  and  this  statement  we  can  manage  in 
various  ways.  We  can  add  to  it  another  similar  statement,  or  we  can  sub 
tract  it ;  we  can  multiply  it ;  we  can  divide  it,  and  discover  various  rela 
tions  which  it  bears  to  other  statements.  In  all  these  operations  the  terms 
pounds,  shillings  and  pence  exactly  resemble  algebraic  symbols,  and  the 
letters  x,  y,  z,  might  be  employed  for  them.  Operations  of  account,  there 
fore,  are  undoubtedly  carried  on  by  abstract  terms  or  symbols,  and  it  is 
impossible  it  should  be  otherwise."  —  Edinburgh  Review,  October,  1808. 

Th.  Smith,  Wilson,  and  others,  who,  during  the  period  of  the  British  sus 
pension,  advocated  the  agency  of  money  of  account,  committed  the  serious 
mistake  of  applying  the  terms,  standard  and  currency,  to  mere  money  of 
account.  It  was  an  error  to  speak  of  a  "  standard  unit,"  and  still  worse 
of  "  abstract  currency."  The  reviewer  expresses  the  true  agency  of  the 
money  of  account. 


TO  MONEY    OF    ACCOUNT. 

employed  daily  and  hourly  in  reference  to  thousands  of  articles 
of  value,  it  cannot  change  unless  some  unfavorable  influence  is 
brought  to  bear  upon  it.  That  which  is  committed  to  the  memo 
ries  of  the  people  of  a  whole  nation — that  wrhich  they  are  repeat 
ing  constantly,  and  multitudes  do  little  else  from  morning  to 
night,  cannot  be  forgotten,  and  cannot  easily  change.  Any  ten 
dency  to  change  in  one  locality  would  be  checked  by  another. 
If  undisturbed,  we  see  no  reason  to  believe  that  the  dollar,  the 
unit  of  our  money  of  account,  would  change  in  a  thousand  years. 
Some  moneys  of  account  are  known  to  have  remained  unchanged 
for  hundreds  of  years,  one  of  which  was  the  money  of  the  Bank 
of  Venice.  Whenever  the  business  of  a  people  continues  unin 
terrupted,  their  money  of  account  must  continue  unchanged,  if 
not  purposely  or  insidiously,  directly  or  indirectly,  attacked. 
Its  principle  and  working  being  understood,  public  authority 
may  be  employed  to  protect  it  from  attack  or  unfavorable  influ 
ences.  Legislation  cannot  suddenly  create  moneys  of  account ; 
it  may  unsettle  and  destroy  those  which  long  use  has  established, 
or  it  may  defend  them,  and  when  it  is  expedient  to  change,  pro 
vide  that  it  may  be  done  with  the  least  possible  injury  to  the 
innumerable  interests  affected. 

There  are  many  ways  in  which  moneys  of  account  become  un 
settled  or  destroyed.  If  the  money  unit  has  a  coin  to  correspond 
with  it,  the  correspondence  is  of  course  a  fact  familiar  to  every 
one.  This  is  the  case  with  our  dollar  coin,  and  our  dollar  unit. 
If  we  had  no  dollar  coin,  the  people  would  have  equal  facility  in 
the  use  of  their  money  of  account ;  but  as  we  have  one,  the  fact 
of  their  being  of  equal  value  is  by  all  taken  for  granted.  Now, 
if  gold  should  very  gradually  fall  in  value,  and  if  the  gold  dollar 
coin  continued  in  circulation  for  a  considerable  length  of  time, 
a  gradual  accommodation  of  the  money  of  account  to  the  coin 
might  take  place.  But  such  changes  being  always  sooner  per 
ceived,  and  better  understood,  by  dealers  in  coins  and  bullion, 
never  take  place  but  at  immense  loss  and  disadvantage  to  the 
bulk  of  the  people ;  because  the  prevailing  systems  of  coinage 
conceal  the  market  price  of  the  precious  metals  from  all  but 
those  initiated  in  the  mysteries  of  the  bullion  market.  Of  course 


MONEY    OF    ACCOUNT.  71 

tliis  cause  of  change  is  much  more  effective  where  the  coin  is 
made  a  legal  tender  for  the  amount  of  the  money  unit.  If,  in 
such  case,  the  coin  falls  in  value,  the  law  still  makes  it  good  for 
the  discharge  of  the  same  amount  as  before  the  depreciation. 
This  conceals  the  fact  of  depreciation,  and  the  unit  of  the  money 
of  account  is  betrayed  into  gradual  conformity  with  a  coin  which 
has  really  lost  its  value,  and  is  reduced  in  its  power  of  purchase. 
This  occurred  in  many  instances  after  the  discovery  of  America, 
and  the  influx  of  silver,  which  was  a  result. 

"The  want  of  a  clear  conception  of  the  existence  and  functions  of  a 
money  of  account  has  beclouded  nearly  all  the  legislation,  and  all  the  spe 
culations  on  the  subject  of  money,  during  the  last  century  and  a  half.  We 
shall  have  occasion  to  note  how  much  it  was  needed  in  the  English  contro 
versies  during  the  period  of  the  bank  restriction.  It  is  strange,  indeed,  that 
what  was  so  well  understood  at  Venice,  and  familiar  there  fur  centuries  to 
her  merchants  who  traded  throughout  the  world,  should  not  have  been  more 
generally  comprehended  elsewhere.  At  Venice  there  wras  a  money  of  account 
which  had  no  coins  to  correspond,  and  nearly  all  the  payments  of  that  great 
city  were  made  in  bank  credits  as  expressed  in  that  money  of  account.  This 
was  so,  also,  in  other  countries. 

"It  is  true  that  kings  and  ministers  were  not  without  some  knowledge 
on  this  subject.  All  the  attempts  to  make  advantage  by  debasing  the  coins, 
or  raising  their  value,  proceeded  from  some  knowledge  of  the  agency  of 
money  of  account.  These  attempts  were  made  in  the  expectation  that  the 
habits  of  the  people,  in  expressing  values  by  the  usual  money  of  account, 
would  lead  them  to  continue  to  estimate  coins  of  the  same  name,  at  the 
same  value,  after  a  part  of  their  proper  quantity  or  quality  had  been  ab 
stracted.  This  kind  of  swindling  was  employed  to  rob  the  people  for  cen 
turies,  with  very  considerable  success,  though  not  always  equal  to  tho 
expectations  of  the  perpetrators.  The  fraud  did  not  consist  in  merrymaking 
the  coins  lighter ;  that  could  readily  be  detected,  and  its  consequences 
avoided  ;  but  it  consisted  in  calling  that  a  crown,  shilling  or  franc,  which 
no  longer  contained  the  same  quantity  of  silver  which  coins  of  these  names 
had  formerly  contained.  When  the  prices  of  all  commodities  were  expressed 
in  these  denominations,  they  could  not  all  readily  be  changed,  and  con 
tracts  would  continue  to  be  made  for  some  time  before  prices  would  be 
adjusted  to  the  change.  The  money  of  account  would  continue  to  operate 
unchanged  long  enough  to  give  rapacious  rulers  some  advantage  of  their 
operation.  But  the  effect  of  names,  and  the  new  coin  being  a  legal  tender, 
would  finally  break  up  the  money  of  account,  and  compel  a  new  adjust 
ment,  or  scale  of  prices.  So  long  as  the  coins  were  named  by  the  denomi 
nations  by  which  prices  were  expressed,  so  long  every  change  in  the  quan- 


72  MONEY    OF    ACCOUNT. 

tity  or  quality  of  metal  in  these  coins,  connected  with  their  being  made  a 
legal  tender,  broke  up  and  destroyed,  soon  or  late,  the  existing  money  of 
account.  This  tampering  with,  disturbing,  and  occasionally  wholly  de 
stroying  the  adjustment  of  prices,  as  expressed  in  the  money  of  account, 
was  an  intense  evil  inflicted  for  ages  upon  the  various  countries  of  Europe. 
It  could  not,  however,  have  been  accomplished  so  successfully  if  the  nature 
of  the  mischief  had  been  understood.  The  mystery  which  shrouded  the 
subject  of  money  enabled  each  perpetrator  of  this  fraud  to  offer  plausible 
arguments  which  the  people  could  not  successfully  refute,  even  if  not  con 
vinced.  Large  capitalists  generally  shared  the  profits  of  these  financial 
operations,  whatever  pains  were  taken  to  reserve  the  whole  to  the  adminis 
tration. 

"  In  Venice,  where  the  money  of  account  was  undisturbed  for  upwards 
of  five  hundred  years,  and  was  the  medium  in  which  the  value  stated  in 
bills  of  exchange  and  bank  credits  were  expressed,  the  chief  payments 
during  all  that  time  were  made  in  bank  credits,  bearing  a  premium  of 
twenty  per  cent,  over  the  precious  metals.  Any  attempt  by  the  Venetian 
government  to  debase  the  coin  would  have  been  futile  and  ineffectual, 
unless  the  bank  had  been  at  the  same  time  destroyed,  and  the  money  of 
account  broken  up.  Many  changes  were  made  in  the  coins  of  Venice,  but 
their  true  value,  in  every  instance,  was  at  once  marked  by  their  value  in 
the  bank  money. 

"  The  various  debasements  in  England  consisted  in,  from  time  to  time, 
increasing  the  number  of  shillings  coined  from  a  pound  of  silver.  In  1066, 
one  toAver  pound  of  silver  was  coined  into  20  shillings;  by  the  year  1464, 
six  debasements  had  increased  the  number  to  376'.  bd.  In  1527,  the  pound 
Troy  of  silver  was  coined  into  45  shillings ;  two  changes  carried  the  num 
ber,  by  the  year  1601,  to  62  shillings.  It  is  now  at  66  shillings.  Now, 
the  mere  reducing  the  weight  of  a  coin  ought  not  to  be  considered  a  debase 
ment,  any  more  than  issuing  half  crowns  instead  of  crowns.  It  was  the 
very  fact  that  the  public  had  the  comparative  value  of  the  shilling  clearly 
in  view,  that  made  it  profitable  to  call  a  less  weight  of  silver  by  the  name 
of  a  shilling.  If  a  piece  of  silver  weighing  20  dwts.  had  been  reduced  to 
19  dwts.,  it  would  have  been  estimated  accordingly.  But  the  shilling,  as 
a  term  of  comparison,  was  applied  to  a  thousand  commodities  of  trade." — 
Bankers'  Magazine,  July,  1857.  Article  by  tlie  author  of  this  volume. 

The  livre  of  France  was  reduced  from  a  pound  of  silver  to 
very  little  more  than  the  hundredth  part  of  a  pound.  In  many 
countries  the  reduction  was  still  greater.  In  all  the  countries 
where  the  unit  of  the  money  of  account  originated  from  the  use 
of  the  pound  of  silver  in  coinage,  it  would,  but  for  the  debase 
ment  of  the  coins,  have  remained  until  this  day  unchanged.  Let 


MONEY    OF    ACCOUNT.  73 

any  one  look  into  the  history  of  one  of  these  violent  changes, 
and  he  will  see  what  a  struggle  it  is  for  a  people  suddenly  to 
change  their  money  of  account,  and  what  confusion  takes  place 
at  such  a  time  in  all  transactions  of  money  and  commerce. 

A  money  of  account  may  also  become  unsettled  or  destroyed, 
and  a  new  one  originated,  by  the  depreciation  of  a  paper  cur 
rency  issued  in  correspondence  with  the  unit  of  a  money  of 
account.  This,  however,  is  not  so  apt  to  occur,  unless  the 
paper  currency  is  a  legal  tender  for  debts,  or  where  some  special 
government  or  bank  paper  composes  the  whole,  or  nearly  the 
whole,  circulation.  If  such  paper  gradually  falls  in  value  to  a 
fixed  depreciation,  it  gives  rise  to  a  money  of  account  corre 
sponding  to  it ;  and  if  sales  be  made  by  that  money  of  account, 
and  payment  be  made  in  coin,  the  latter  is  valued  in  the  money 
of  account  high  enough  to  cover  the  depreciation.  Many  in 
stances  of  this  are  met  with  in  Europe ;  and  remarkable  cases 
are  found  in  Austria  and  Russia.  It  wras  urged,  as  we  have 
already  noticed,  by  many  in  England,  that  the  notes  of  the 
Bank  of  England  were  depreciated,  during  the  suspension  of 
specie  payments,  precisely  in  proportion  to  the  enhanced  price 
of  gold.  If  this  had  been  so,  the  English  money  of  account 
would  have  been  changed  in  the  same  proportion ;  that  is,  above 
ten  per  cent.  That  appeared  to  be  so  to  those  who  could  not 
conceive  that  gold  could  rise  in  value  sufficiently  to  account  for 
all  that  difference ;  but  it  was  denied  by  those  who  could  not 
believe  that  ten  per  cent,  had  been  added  to  the  nominal  value 
of  everything  in  Great  Britain  except  gold.  It  cannot  be  de 
nied,  however,  that  if  the  Bank  of  England  had  not,  in  that 
important  crisis,  been  managed  with  signal  wisdom  and  skill ; 
and  if  the  government,  in  that  time  of  great  expenditure,  had 
not  acted  towards  the  bank  with  equal  prudence  and  for 
bearance,  the  notes  would  have  depreciated  to  a  much  greater 
extent  than  ten  per  cent.  It  may  be  questioned  whether  any 
instance  of  like  good  management  on  the  part  of  bank  directors, 
and  like  forbearance  on  the  part  of  a  needy  government,  can  be 
found.  England  thus  saved  her  money  of  account,  and  avoided 
immense  derangement  of  the  pecuniary  concerns  of  the  people. 


74  MONEY    OF    ACCOUNT. 

The  history  of  the  suspension  of  the  Bank  of  England  for 
twenty-five  years  is  probably,  taken  in  all  its  bearings,  one  of 
the  most  instructive  portions  of  the  history  of  money.1  The 
undeniable  fact  that  all  the  dealings  of  that  period  of  foreign 
war,  and  increased  commerce  and  industry,  were  carried  on  in 
the  language  of  the  English  money  of  account ;  and  that  nearly 
the  whole  of  the  payments  were  made  in  irredeemable  bank 
notes,  and  in  checks  upon  banks  not  paying  gold  or  silver,  can 
not  be  explained  but  by  the  agency  of  money  of  account,  and  its 
important  subserviency  to  the  credit  system. 

CONCLUDING    REMARKS. 

The  reader  is  specially  desired  to  notice  that  we  are  not,  in 
this,  bringing  forward  or  recommending  any  new  mode  of  reck 
oning  or  computation.  We  simply  assert  the  matter  of  fact,  that 
all  prices,  all  books  of  account,  all  statements  of  sums  of  money, 
all  bills  of  exchange  and  promissory  notes,  and  all  bank-notes, 
are  expressed  in  money  of  account.  All  that  is  said  or  done 
with  reference  to  money,  where  neither  gold  nor  silver,  nor  other 
medium,  is  employed,  is  merely  a  use  of  money  of  account.  If 
this  be  a  fact  in  the  mental  habits  of  all  civilized  people,  as  we 
not  only  aver  it  to  be,  but  that  it  cannot  be  otherwise,  it  is  im 
portant  to  comprehend  all  its  uses.  We  must  accept  the  fact, 
if  it  be  one,  together  with  all  its  inevitable  and  all  its  proper 
consequences.  The  conclusions  to  be  drawn  from  this  fact  are 
a  separate  consideration.  There  may  be  differences  of  opinion 
as  to  the  deductions  which  may  be  drawn  from,  or  the  uses 
which  may  be  made  of  it ;  but  whatever  these  may  be,  we  must 
not  shut  our  eyes  to  a  fact  so  important,  the  proof  of  which  is 
so  obvious  and  so  indisputable,  and  the  influences  of  which  are 
in  constant  and  active  operation,  whether  we  notice  them  or  not. 

1  See  ante,  page  52,  and  closing  pages  of  Chapter  on  Bank  of  England. 


NOTES    TO    CHAPTER   II. 
I. 

MARQUIS   GARNIER  AND   HIS   CRITIC,   LETRONNE. 

No  writer,  so  far  as  we  know,  has  apprehended  more  clearly  the  nature 
of  a  money  of  account,  than  the  Marquis  Garnier,  who,  in  1817,  read  to  the 
French  Academy  of  Inscriptions  and  Belles-Lettres  a  memoir  upon  the 
values  of  moneys  of  account  among  the  nations  of  antiquity.  He  published 
afterwards,  in  1819,  a  "  History  of  Money  from  the  highest  antiquity  to  the 
reign  of  Charlemagne."  The  latter  work  contains  a  chapter  on  Moneys  of 
account,  which  embraces  the  substance  of  the  previous  memoir.  This 
learned  writer  ascertained,  in  the  course  of  his  investigations,  that  it  was 
impossible  to  comprehend  the  ancient  writers  when  they  spoke  of  money, 
or  to  arrive  at  any  sound  conclusions  in  transferring  the  money  of  ancient 
times  into  modern  money,  without  resorting  to  the  distinction  between 
coins  and  money  of  account.  We  know  that  the  money  of  many  modern 
nations  cannot  be  properly  appreciated  without  a  due  knowledge  of  their 
money  of  account;  and  can,  therefore,  readily  admit  that  such  knowledge 
is  equally  important  in  the  just  appreciation  of  ancient  moneys.  Without 
entering  into  this  question,  or  vouching  for  the  conclusions  reached  by  Ger 
main  Garnier,  we  give  his  clear  definition  of  money  of  account:  — 

"We  distinguish  then,"  he  says,  "two  kinds  of  money  —  real  money,  or 
coins,  and  money  of  account,  which  is  the  expression  of  values,  or  the  spe 
cification  of  prices.  The  valuation  of  merchandize  made  by  the  seller,  the 
offer  made  by  the  purchaser,  the  accounts,  the  promises  to  pay,  the  stipula 
tions  of  hiring,  quotations  of  stocks,  and  the  rents  of  farms,  all  that  in 
every  transaction  precedes  the  act  of  payment,  must  be  carried  on  by  means 
of  money  of  account.  Real  money  only  intervenes  for  actual  payments." — 
"  The  elements  of  which  a  money  of  account  are  made  up  consist,  properly 
speaking,  of  arithmetical  quantities,  which  can  be  mentally  multiplied  and 
divided."  —  "  Real  moneys  consist  of  coins  of  metal,  of  which  the  form, 
material,  impress  and  appearance  may  be  readily  changed,  without  occa 
sioning  the  slightest  derangement  in  the  daily  dealings  of  society,  or  in 
agreements  and  contracts  already  made."  —  "  But  as  to  money  of  account 
which  has  no  determined  form,  being  in  its  nature  incorporeal,  it  is  one  of 
the  institutions  to  which  people  are  most  strongly  and  constantly  attached 
by  the  powerful  influences  upon  the  mind  of  a  habit  incessantly  applied  to 

(75) 


76  NOTES    TO    CHAPTER    II. 

the  highest  interests  of  common  life.  The  denominations  of  the  money  of 
account,  the  order  and  proportion  of  its  divisions,  assume  at  length  an  inva 
riable  character,  and  remain  the  same  during  the  lapse  of  ages,  to  such  an 
extent,  indeed,  that  only  more  powerful  influences,  or  great  political  events, 
can  effect  any  change.  The  value  of  this  money  of  account  would  have  been 
not  less  steady  and  unchanging  than  its  denominations  and  subdivisions, 
if  the  injustice  and  rapacity  of  governments  had  not  frequently  employed 
them  to  cheat  their  creditors  and  defraud  the  people,  by  adopting  the  expe 
dient  of  lessening  the  value  of  coins.  The  people,  not  aware  of  the  change 
in  the  coins,  would  continue  for  some  time  to  estimate  them  in  their  money 
of  account  at  the  same  price  for  which  they  passed  before  the  debasement, 
and  at  which  obligations  and  contracts  were  previously  made.  But  every 
alteration  in  money  of  account  has  been  regarded  as  a  public  calamity,  as  a 
source  of  disorders,  public  and  private ;  and  it  has  always  awakened  among 
a  people  a  general  discontent.  On  the  contrary,  changes  in  the  impression 
or  the  forms  or  denominations  of  coins  is  a  common  event,  inflicting  no 
injury  upon  any  interest,  and  offending  against  no  established  habits  of 
the  people."  l 

This  is  a  clear  view  of  the  nature  of  money  of  account,  as  well  as  of 
the  distinction  between  it  and  coins,  or  real  money.  His  success  in  apply 
ing  this  distinction  to  ancient  moneys  has  been  disputed  by  Letronne,who, 
whatever  may  have  been  his  other  qualifications,  as  a  critic  of  Garnier,  fur 
nishes  no  evidence  in  his  work  of  his  knowledge  of  that  distinction.2  The 
difficulties  which  surround  that  subject  are,  perhaps,  greater  than  any  with 
which  adepts  in  ancient  history  have  had  to  grapple.  It  is  very  certain 
that  the  distinction  taken  by  Garnier,  above  quoted,  could  not  but  be  a  great 
assistance  in  historical  researches  touching  values ;  and  that  no  man  can 
understand  the  subject  of  money,  ancient  or  modern,  who  does  not  compre 
hend  the  nature  of  a  money  of  account. 

"We  would  not  undertake  to  decide  upon  the  point  in  dispute  between 
Garnier  and  Letronne.  It  requires  something  more  than  a  full  appreciation 
of  a  money  of  account  to  decide  upon  the  real  value  of  ancient  moneys :  on 
the  other  hand,  it  may  be  well  doubted  whether  any  man  is  capable  of 
adequately  mastering  the  subject,  who  does  not  fully  understand  what  is 
meant  by  a  money  of  account.  We  fear  that  Letronne  labored  under  this 
disadvantage.  He  speaks  of  ideal  moneys,  but  in  no  place  exhibits  any 
real  comprehension  of  a  money  of  account.  He  professes  to  meet  Mar 
quis  Garnier  on  the  ground  of  facts  alone.  We  enter  not  into  the  issue 
between  them  here ;  the  reasoning  of  both  appears  to  be  often  inconclu 
sive.  Garnier  adopts  the  idea  that  there  was  a  general  money  of  account 
prevailing  extensively  among  the  civilized  nations  of  antiquity.  Modern 

1  "  Histoire  do  la  Monnaic,"  par  Marquis  Garnier.     Tome  i,  pp.  72  to  76. 
3  "  Considerations  sur  1'evaluation  des  Monnaies  Grecques  et  Romaine/'  <fcc.     4to, 
Paris.  1817. 


NOTES    TO    CHAPTER    II.  77 

experience  tends  to  contradict  this,  as  every  modern  nation  has  its  own 
money  of  account,  and  many  have  several.  One  of  the  proofs  to  which  he 
appeals  as  evidence  of  this,  is  the  fact  that  Jacob  sent  money  by  his  sons 
to  purchase  corn  in  Egypt,  which  money  was  received  and  valued,  as  he 
supposed,  by  a  common  money  of  account.  Now  it  does  not  follow,  by  any 
means,  that  because  Jacob's  money  was  received  by  the  officers  of  Egypt, 
it  was  estimated  by  the  money  of  account  used  by  Jacob  himself.  British 
sovereigns  may  be  paid  for  any  article  in  France,  but  would  always  be 
estimated  and  reckoned  as  so  many  francs.  As  people  think  in  their  ver 
nacular  language,  so  they  always  estimate  and  deal  in  their  own  money  of 
account. 

Letronue,  referring  to  the  instance  of  Jacob's  money  being  received  in 
Egypt,  very  correctly  says  it  was  received  by  weight ;  and  from  this  he 
very  incorrectly  infers  that  there  could  have  been  no  common  money  of 
account  in  the  case.  This  plainly  evinces  that  he  did  not  understand  the 
real  nature  of  money  of  account.  It  is  not  probable  that  any  people  ever 
weighed  gold  or  silver  in  payment,  who  had  not  a  money  of  account,  in 
•which  they  expressed  the  price  or  value  of  the  different  quantities.  In 
China,  and  in  many  other  countries,  gold  and  silver  pass  only  by  weight, 
but  its  value  is  always  expressed  in  money  of  account.  Whether  the  people 
of  Mesopotamia,  where  Jacob  dwelt,  and  the  people  of  Egypt,  used  the 
same  money  of  account,  cannot  be  ascertained  from  the  fact  that  Jacob's 
money  passed  in  Egypt.  All  money  of  gold  or  silver  will  pass  in  China  by 
weight :  so,  doubtless,  the  money  of  all  the  world  would  have  purchased 
corn  in  Egypt,  being  paid  by  weight.  The  "four  hundred  shekels  of  sil 
ver"  weighed  by  Abraham,  in  payment  to  Ephron  for  the  cave  of  Machpe- 
lah,  was  "  current  (money)  with  the  merchant." 


II. 

EXTRACTS 

From  an  Article  in  the  "Bankers'  Magazine,"  of  New  York,  in  the  July  and 
August  Nos.  q/1857,  by  the  Author  of  this  Volume. 

MONEY    OF    ACCOUNT. 

"INQUIRING  prices,  and  fixing  them,  occupy  a  large  portion  of  the  time 
and  attention  of  all  men  in  trade,  and  not  a  little  of  many  others  whose  only 
connection  with  business  is  to  purchase  for  the  supply  of  their  own  wants. 
The  conversation  and  discussion  on  the  subject  of  prices,  where  no  sale  or 
transaction  takes  place,  greatly  exceeds,  perhaps  ten-fold,  that  which  results 
in  a  change  of  property.  The  minds  of  a  large  proportion  of  the  people  in 
all  thriving  business  communities  become  familiar  with  the  prices  of  a  cer« 


T8  NOTES    TO    CHAPTER    II. 

taiu  range  of  articles  which  they  have  most  occasion  to  purchase  or  sell. 
They  keep  pace  with  the  fluctuations,  and  are  well  advised  when  they  are 
asked,  more  or  less,  for  any  given  commodities.  These  respective  or  com 
parative  prices  are  readily  borne  in  mind.  Housekeepers  well  know  the 
comparative  rates  of  coffee,  tea,  sugar,  rice,  pepper,  and  other  things  which 
go  to  swell  the  household  expenses.  They  know  that  a  pound  of  beef  is 
•worth  more  than  a  pound  of  bread,  and  that  a  pound  of  butter  is  worth 
more  than  one  of  beef;  and  not  only  so,  but  they  know  it  accurately  and 
independently  of  any  actual  purchase;  they  know  it  without  actually 
naming  any  price  in  money  for  each  article.  This  idea  of  the  comparative 
price  of  these  articles  is  carried  in  their  minds  with  perfect  facility.  And 
although,  for  facility  and  perfect  convenience,  these  prices  are  expressed  in 
money,  yet  any  one  familiar  with  prices  could  readily  say  a  pound  of  rice 
is  worth  two  pounds  of  flour,  a  pound  of  beef  is  worth  four  of  flour,  a  pound 
of  tea  is  worth  eight  of  coffee,  a  bushel  of  wheat  is  worth  two  of  potatoes, 
and  very  many  could  run  round  a  whole  range  of  comparisons,  showing  a 
definite  and  precise  idea  of  the  respective  prices  of  the  articles  named. 

"  In  all  business  transactions,  prices  are  fixed  and  expressed  in  money 
of  account.  It  forms  the  universal  medium  of  estimate  and  comparison. 
Money  of  account  may  either  correspond  with  the  current  coins  or  not.  In 
England,  all  valuations  are  made  in  the  terms  pounds,  shillings,  pence  and 
farthings,  and  occasionally  in  guineas.  The  coins  correspond  ;  that  is,  in 
naming  a  pound,  you  express  a  sum  or  value  which  has  an  equivalent  in 
the  sovereign ;  the  shilling  of  account  has  its  equivalent  in  the  coined  shil 
ling,  and  so  of  the  penny.  In  the  United  States,  the  money  of  account  is 
expressed  in  dollars  and  cents,  and  the  coins  correspond.  In  many  coun 
tries,  however,  the  money  of  account  and  coins  do  not  correspond.  In 
China,  prices  are  expressed  in  tales,  mace  and  candarines ;  and  accounts 
are  so  kept,  and  evidences  of  debt  are  written  in  the  same  way  ;  so  that 
these  denominations  are  the  money  of  account.  Coins  are  not  used  in  China. 
Gold  and  silver  are  largely  used  in  payments  and  mercantile  transactions, 
but  always  by  weight,  being  valued  like  other  commodities  in  the  money 
of  account — the  value  or  price  fluctuating  according  to  the  plenty  or 
scarcity,  the  rate  of  exchange,  the  degree  of  fineness,  and  other  causes. 
There  is  a  very  great  diversity  in  Europe  in  the  moneys  of  account  and 
coins ;  in  many  places  there  are  various  modes  of  keeping  accounts,  and 
various  systems  of  coins,  and  no  agreement  among  them  ;  in  some  there  is 
a  partial  agreement.  In  Gibraltar,  accounts  are  kept  in  dollars,  which  ex 
press  a  value  equal  to  about  two-thirds  of  our  dollar,  and  without  any  cor 
responding  coin.  [See  '  Kelly's  Cambist,'  '  Grund's  Merchant's  Assistant/ 
and  other  similar  works;  'Austria,  Venice,  Genoa.']  In  making  a 
price,  it  is  first,  by  inveterate  habit,  stated  in  the  old  way,  and  then  con 
verted,  if  necessary,  into  the  new,  as  men  sometimes  think  in  one  language 
and  express  themselves  in  another.  So  if,  in  Great  Britain,  sovereigns  and 


NOTES    TO     CHAPTER    II.  79 

shillings  were  \vholly  withdrawn  from  circulation,  and  Spanish  or  French 
coins  substituted,  the  people  would  continue  to  think  and  value  in  pounds, 
shillings  and  pence  until  some  powerful  disturbing  cause  broke  down  the 
habit.     It  is  more  than  half  a  century  since  the  present  admirable  metrical 
system  of  weights  and  measures  was  adopted  in  France,  with  all  the  advan 
tage  of  a  decimal  system ;  yet  the  mass  of  the  people  continue  to  think  and 
estimate  under  the  imperfect  and  complicated  systems  which  had  been  long 
in  possession  of  the  public  mind.    The  idea  of  a  specific  value  and  quantity 
once  lodged  in  the  mind,  and  familiarized  by  daily  and  constant  use,  will 
be  as  difficult  to  eradicate  as  one's  native  language.     We  may  learn  a  new 
language,  but  we  cannot  easily  forget  that  in  which  we  have  chiefly  con 
versed  from  childhood,  and  in  which  we  must  continue  to  shape  our  ideas 
long  after  we  may  begin  to  express  them  in  another.     There  are  great 
numbers  of  business  men  familiar  with  the  prices  of  a  large  number  of  the 
commodities  of  trade,  engaged  in  daily  discussing  them,  making  sales  and 
purchaser,  or  quite  competent  to  make  them,  yet,  when  produced  and  ex 
hibited,  wholly  unable  to  recognise  the  quantities  of  which  they  speak,  or 
to  specify  the  quantity  of  gold  or  silver  which  is  the  equivalent  of  the  prices 
they  so  fluently  quote.     They  can  tell  you  the  price  of  a  ton  of  iron,  a  hun 
dred  weight  of  sugar,  or  a  barrel  of  flour ;  but  they  might  be  wholly  unable 
to  tell  whether  a  lot  of  iron  contained  one  or  five  tons,  whether  a  lot  of  sugar 
contained  one  or  five  cwts.,  or  whether  a  barrel  of  flour  contained  one  or 
five  hundred  pounds.     Nor  could  they  tell  the  weight  or  size  of  the  quanti 
ties  of  gold  or  silver  which  would  be  equivalent  to  the  prices  named.     The 
editor  of  a  price-current,  who  is  constantly  conversant  with  prices  of  almost 
the  whole  range  of  commerce,  and  quite  able,  from  his  familiarity  with 
prices,  to  buy  and  sell,  may  be  wholly  ignorant  of  coins,  of  the  mode  of 
weighing  the  precious  metals,  or  any  other  commodity.     When  coins  are 
wholly,  and  for  a  long  period,  banished  from  circulation,  men  find  no  diffi 
culty  in  naming  prices  and  proceeding  with  the  whole  business  of  trade.  In 
the  United  States,  gold  and  silver  are  the  only  legal  tender  in  payment  of 
debts,  and  yet  not  one  thousand  dollars  of  debt  in  a  thousand  millions  is 
paid  in  those  metals.     Men  must,  therefore,  be  much  more  familiar  with 
prices,  and  with  money  of  account,  than  they  are  with  the  precious  metals. 
"When  a  price  is  fixed,  in  the  ordinary  course  of  dealing,  the  naming 
such  a  price  is  not  the  same  thing  as  holding  up  to  the  party  to  whom  it  is 
named  a  quantity  of  gold  or  silver  of  equivalent  value.     When  a  barrel  of 
flour  is  said  to  be  worth  five  dollars,  the  party  fixing  that  price  does  not 
mean  the  quantity  of  gold  in  a  half  eagle,  or  of  silver  in  five  dollars,  for 
that  quantity  he  does  not  know.     He  uses  the  same  expression  he  would 
use  if  he  were  asked  the  value  of  the  half  eagle,  '  five  dollars.'     So  if,  in 
England,  an  article  is  said  to  be  worth  fifty-five  shillings,  neither  party 
forms  any  idea  of  the  quantity  of  gold  equivalent  to  that  amount,  although 
payment  cannot  be  made  in  silver  beyond  forty  shillings.     So,  during  our 


80  NOTES    TO    CHAPTER    II. 

Revolutionary  War,  when  for  many  years  there  was  only  a  paper  circula 
tion,  prices  were  expressed  in  the  various  currencies  of  the  different  colo 
nies,  and  very  few  indeed  could  have  been  guided  by  the  quantity  of  gold 
or  silver  equivalent  to  any  price  expressed  in  their  pounds,  shillings  and 
pence. 

"  It  is  evident,  therefore,  that  money  of  account  is  the  medium  in  which 
prices  are  quoted  and  expressed  in  all  countries.  It  is  capable  of  mea 
suring,  comparing  and  stating  values  to  the  utmost  extent  of  the  require 
ments  of  trade.  Much  confusion  of  ideas  has  arisen  from  blending  the 
functions  of  coin  with  those  of  money  of  account,  in  legislation,  in  works 
on  the  subject  of  money,  and  in  conversation.  It  is  unfortunate  for  clear 
views  on  this  subject,  that  the  money  of  account  has  not,  in  all  countries, 
as  in  China,  been  kept  wholly  distinct  from  the  coins. 

"  The  errors  prevalent  on  this  subject  are  very  distinctly  exemplified  by 
Mr.  Locke,  in  his  tract  on  money,  published  in  the  controversy  on  the  re- 
coinage  in  England,  at  the  close  of  the  17th  century.  The  great  philoso 
pher  had  no  conception  of  the  real  functions  of  a  money  of  account.  He 
tells  us  that  '  Men,  in  their  bargains,  contract  not  for  denominations  or 
sounds,  but  for  the  intrinsic  value,  which  is  for  the  quantity  of  silver  by 
public  authority  warranted  to  be  in  pieces  of  such  denominations  ;  and  it 
is  by  having  a  greater  quantity  of  silver  that  men  thrive  and  grow  richer, 
and  not  by  having  a  greater  number  of  denominations,  which,  when  they 
come  to  have  need  of  their  money,  will  prove  but  empty  sounds,  if  they  do 
not  carry  with  them  the  real  quantity  of  silver  expected.7 1  Again :  '  The 
yard  or  quart  men  measure  by,  may  rest  indifferently  in  the  buyers  or  sell 
ers,  or  a  third  person's  hands,  it  matters  not  whose  it  is.  But  it  is  not  so 
in  silver.  It  is  the  thing  bargained  for,  as  well  as  the  measure  of  the  bar 
gain  ;  and,  in  commerce,  passes  from  the  buyer  to  the  seller,  as  being  in 
such  a  quantity  equivalent  to  the  thing  sold  ;  and  so  it  not  only  measures 
the  value  of  the  commodity  to  which  it  is  applied,  but  is  given  in  exchange 
for  it.  But  this  it  does  only  by  its  quantity,  and  nothing  else.  For  it  must 
be  remembered  that  silver  is  the  instrument  as  well  as  measure  of  commerce. 
And  every  one  desiring  to  get  as  much  as  he  can  of  it  for  any  commodity 
he  sells,  it  is  by  the  quantity  of  silver  he  gets  for  it  in  exchange,  and  by 
nothing  else,  that  he  measures  the  value  of  the  commodity  he  sells/  (Page 
4,  5,  idem.} 

11  As  the  arguments  and  authority  of  Mr.  Locke  are  greatly  relied  upon 
in  the  controversy  which  has  been  waged  on  this  subject,  it  may  be  proper 
to  state  his  views  still  more  fully.  After  having  insisted  upon  silver  as  the 
proper  standard  of  value,  and  urged  his  objections  to  the  double  standard, 
he  adds:  'One  metal,  therefore,  alone  can  be  the  money  of  account  and 
contract,  and  the  measure  of  commerce  in  any  country.  The  fittest  for  this 

1  Page  9  of  Locke's  Tract.  "  Further  Considerations  on  raising  value  of  Money,"  2d 
ed.,  1695. 


NOTES    TO    CHAPTER    II.  81 

use  is  silver.  It  is  enough  that  the  vrorld  has  agreed  in  it,  and  made  it 
their  common  money ;  and,  as  the  Indians  rightly  call  it,  measure,  all  other 
metals,  gold  as  well  as  lead,  are  but  commodities.' l 

"If  these  misconceptions  were  not  still  frequently  reiterated,  it  would 
scarcely  seem  necessary  to  refute  them,  as  that  was  done  at  the  time  of 
their  publication,  and  has  been  frequently  since.  In  Mr.  Locke's  day,  silver 
was  the  common  medium  of  payment  in  small  transactions,  and  he  was  not 
familiar  with  the  modes  of  payment  in  the  large  operations  of  trade.  lie 
could  not  distinguish  between  the  shilling  of  account  and  the  shilling  of 
silver.  Even  in  the  17th  century,  before  the  Bank  of  England  emitted  a 
paper  currency,  a  large  portion  of  the  great  payments  of  commerce  were 
effected  in  various  other  ways  among  merchants,  than  by  the  transfer  of 
the  precious  metals.  When  Mr.  Locke  asserted  that  men  did  not  contract 
for  denominations,  he  simply  overlooked  the  fact  that  they  contracted  by 
them.  They  used  denominations  continually  as  a  scale,  a  measure,  or  an 
instrument,  in  all  their  quotations  of  price,  valuations  and  bargains,  but 
only  used  silver  and  gold  when  they  were  actually  present,  and  then  as  a 
commodity  and  an  equivalent.  Mr.  Locke  could  not  foresee  that,  for  nearly 
a  quarter  of  a  century,  gold  and  silver  almost  disappeared  from  the  circu 
lation  of  England,  and  that,  during  that  period,  men  were  so  far  from 
always  contracting  for  silver  or  gold,  that  no  man  ever  expected  to  receive 
any  payment  in  these  metals,  or  either  of  them.  lie  could  not  foresee  that 
his  descendant,  Lord  King,  would  make  himself  conspicuous  as  the  only 
man  in  the  nation  who  insisted  on  being  paid  in  gold,  giving  his  tenants 
special  notice  that  their  rents  could  only  be  discharged  in  that  way.  Yet 
all  the  business  of  the  trade  and  revenue  of  Great  Britain,  from  1797  to 
1822,  a  period  of  immense  operations  in  war  and  commerce,  was  carried  on 
by  the  aid  of  the  denominations  pounds,  shillings  and  pence,  and  bank-notes. 
The  theory  of  Mr.  Locke  must  fall  to  the  ground  before  such  an  example 
as  this,  whatever  may  have  been  the  efforts  of  Lord  King  to  uphold  it  by 
his  individual  exertions.2 

"The  controversy  in  which  Mr.  Locke  launched  his  "  Further  Considera 
tions  concerning  raising  the  value  of  Money,"  would  have  been  of  still 
greater  importance  if  it  had  resulted  in  a  true  solution  of  the  question.  It 
was,  however,  conducted,  though  with  great  ability,  under  an  entire  mis 
apprehension,  by  both  parties,  of  the  true  issue.  The  points  started  excited 
inquiry  and  speculation  on  the  subject  of  money  to  such  an  extent,  that 
England,  during  the  last  century  and  a  half,  has  produced  more  writings 
on  currency,  banking  and  money,  than  all  the  world  beside.  To  these  may 

1  Page  31,  idem.     His  views  stated  shortly  at  page  22. 

2  Lord  King  published  a  pamphlet  on  the  restriction  of  specie  payments  by  the  bank, 
in  1803,  and  gave  the  notice  mentioned  to  his  tenants.     This  occasioned  a  special  act 
of  Parliament,  which  showed  that  the  ministry  of  the  day  understood  the  subject  as 
little  as  his  lordship. 

6 


82  NOTES     TO     CHAPTER     II. 

be  added  a  huge  pile  of  folios  emanating  from  Parliamentary  Committees, 
embodying  a  mass  of  valuable  facts,  evidence  and  experience.  The  miscon 
ceptions  of  Mr.  Locke  and  Mr.  Lovrndes  have  never  yet  been  cleared  up.  It 
\vas  impossible  for  them  ever  to  coincide,  because  they  regarded  the  subject 
from  a  different  point  of  view,  and,  of  course,  with  different  objects  and 
impressions.  A  full  comprehension  of  the  nature  of  money  of  account  was 
needed  to  enable  them  to  grapple  with  the  real  difficulties  of  the  recoinage. 
That  step  had  become  necessary  by  the  miserable  state  of  depreciation  into 
which  the  coins  of  the  realm  had  sunk  during  the  last  half  of  the  17th  cen 
tury.  Owing  to  the  natural  wear,  and  the  frauds  by  clipping,  punching, 
sweating,  and  other  similar  means,  the  silver  coins  had  depreciated  from 
jive  to  tiventy  per  cent.1  The  point  to  be  settled  for  the  action  of  the  govern 
ment  was,  whether  the  new  coins  should  be  issued  of  the  original  weight, 
or  be  made  to  correspond  to  their  value  at  the  average  depreciation.  Mr. 
Locke,  who  for  the  want  of  a  merchant's  familiarity  with  the  subject  of 
money,  could  not  bring  his  powers  of  abstraction  to  bear,  did  not  conceive 
of  a  mere  money  of  account,  but  involved  himself  in  a  labyrinth  of  fallacies, 
by  treating  silver  coin  as  the  only  possible  money.  His  fundamental  posi 
tions  were  in  connection  with  those  already  cited,  that  '  Silver  is  the  instru 
ment  and  measure  of  commerce  in  all  the  civilized  and  trading  parts  of  the 
world.'  '  The  intrinsic  value  of  silver  considered  as  money,  is  that  esti 
mate  which  common  consent  has  placed  on  it.'  '  That  an  equal  quantity 
is  always  of  equal  value  to  an  equal  quantity  of  silver.' 2  The  last  position 
is  always  true,  says  Ruding,  except  in  the  case  of  coinage,  to  which  Locke 
applied  it.3 

"These  unsound  and  oft-refuted  positions  are  sufficiently  plausible  to 
influence  many  minds.  The  least  reflection  will  satisfy  practical  men  that 
silver  is  not  the  instrument  and  measure  of  commerce ;  it  is  merely  one  of 
the  agents  sometimes  employed  in  trade,  but  frequently  dispensed  with,  and 
never  indispensable.  The  intrinsic  value  of  silver  is  fixed,  like  the  value 
of  other  articles,  by  the  cost  of  obtaining  it,  by  the  demand  for  it,  and  by 
other  causes,  special  and  general,  applicable  to  other  commodities.  An 
equal  quantity  of  silver  is  not  always  at  the  same  price  with  an  equal  quan 
tity  of  silver,  because  that  implies  that  no  change  ever  takes  place  in  the 
value  of  silver,  when,  at  the  present  time,  all  merchants  know  that  it  does 
change  frequently ;  and  our  price-currents  chronicle  these  changes  in  the 
price  of  gold  and  silver,  as  they  do  other  changes  in  price.  Entertaining 
these  false  notions,  Mr.  Locke  looked  upon  a  crown  or  five-shilling  piece, 
or  a  shilling,  or  a  Spanish  dollar,  as  a  certain  defined  quantity  of  silver, 
unalterable  in  value,  and  inseparable  in  idea  from  the  silver  itself.  In  his 
view,  goods  were  only  sold  for  the  silver  named  as  the  price.  He  could  not 

1  "Lowndes,"  GO,  61.     Taylor  on  "Money  System  of  England,"  81. 

2  Pages  1,  2,  "Locke's  Tract." 

3  Rudiug's  "Annals  of  the  Coinage,"  vol.  ii.  page  42. 


NOTES     TO     CHAPTER     II.  83 

understand  that  dollars  could  be  said  to  be  worth  4s.  &d.,  4s.  Id.,  4s.  8d., 
&c.,  or  that  crowns  could  be  quoted,  in  case  of  a  demand  for  silver  in  France 
or  Holland,  or  in  case  of  a  high  exchange,  at  55-.  Irf.  or  5s.  2d.,  &c.  He 
saw  the  confusion  of  terms,  but  could  not  understand  why  19T^  dwts.  of 
uncoined  silver  should  be  at  a  higher  price  than  a  crown  purporting  the 
same  weight ;  nor  why  an  ounce  of  silver,  at  the  very  time  he  wrote,  was 
selling  at  6s.  5d.,  when  it  ought  to  be  worth  only  5s.  2d.,  by  his  doctrine. 
For,  formerly,  when  the  full' weight  crown  was  worth  only  five  shillings  for 
the  19/o  dwts.  of  silver  it  contained,  the  ounce  of  silver  was  only  worth  5s. 
2d.  Silver  had,  therefore,  apparently  risen  about  20  per  cent.  All  this,  to 
Mr.  Locke's  mind,  was  the  merest  confusion  of  terms,  wholly  unintelligible, 
the  jugglery  of  agiotage ;  fo,r  with  him  a  dollar  was  a  dollar,  a  crown  a  crown, 
a  shilling  a  shilling,  an  ounce  of  silver  an  ounce,  and  nothing  more  or  less. 
He  supposed  that  men's  minds  had  become  confused,  and  that  no  change 
had  taken  place  except  a  depreciation  in  the  defaced  and  clipt  coins.  His 
opponents  saw  very  clearly  the  apparent  change  in  value.  They  saw  clearly 
that,  as  matters  then  stood,  a  crown  of  full  weight  was  worth  6s.  3c?.,  and 
not  merely  5s.,  as  formerly  rated.  '  That  silver  in  England  being  grown 
scarce,  is  consequently  grown  dearer.  That  it  is  risen  in  price  from  5s.  Zd. 
to  6s.  5d.  per  ounce.7  *  This  seemed  to  them  an  actual  enhancement  of 
price.  It  was  only  apparent,  however,  for  no  such  increase  of  price  had 
taken  place  on  the  continent.  The  real  difficulty  in  this  question,  in  which 
"both  parties  were  partly  right,  was  that  neither  understood  nor  appreciated 
the  nature  and  functions  of  a  money  of  account.  T*he  coins  had,  according 
to  the  usage  of  Europe,  been  made  to  correspond  with  the  money  of  account, 
a  correspondence  which  has  produced  unnumbered  mischiefs,  and  stood 
darkly  in  the  way  of  clear  views  of  the  subject  of  money.  As  the  coins,  in 
the  course  of  half  a  century,  gradually  lost  value  by  abrasion  or  clipping, 
the  money  of  account  followed,  with  a  change  which  was  so  gradual  that 
the  public  took  no  note  of  it.  Shillings,  which  had  lost  a  fourth  of  their 
weight,  were  still  called  shillings';  crowns,  which  had  lost  a  tenth,  were 
still  called  and  treated  by  the  mass  of  the  people  as  worth  five  shillings. 
But  when,  after  1690,  the  depreciation  had  reached  an  average  of  15  per 
cent.,  the  extent  of  the  evil  began  to  be  felt.  As  soon  as  silver  coins  began 
to  be  exported,  upon  an  unfavorable  exchange,  they  were  treated  as  bullion, 
and  valued  in  the  money  of  account  of  the  countries  to  which  they  were  to 
be  exported  according  to  their  actual  weight.  It  was  found  at  once,  that 
while  the  great  mass  of  the  sales  and  transactions  of  the  country  was  car 
ried  on  in  the  old  denominations,  and  with  the  imperfect  coins,  and  these 
old  denominations  had  gradually,  in  the  minds  of  the  mass  of  the  people, 
kept  pace  with  the  coins,  the  merchants  in  the  foreign  trade,  familiar  with 
the  price  of  bullion  at  home  and  abroad,  very  clearly  saw  the  change  which 

1  "Essay  for  Amendment  of  the  Silver  Coins."     Lowndes,  page  77. 


8-4  NOTES    TO    CHAPTER    II. 

had  taken  place;  that  the  coins  were  worth  intrinsically  less  than  formerly, 
and  they  gave  Gs.  3cZ.  for  a  crown  of  full  weight.  But  Mr.  Locke  denied 
that  they  gave  6s.  3d.,  and  insisted  that  only  5s.  was  given  in  depreciated 
coins  called  6s.  3d.,  but  having  only  5s.  of  silver  in  them.  Confusion  had 
invaded  the  money  of  account,  and  men  differed  about  what  was  meant  by 
five  shillings.  Mr.  Locke  insisted  that  the  new  crowns  should  contain  the 
same  quantity  of  silver,  10^  dwts.,  as  formerly,  because  that  quantity  was 
5s. ;  Mr.  Lowndes  insisted  that  that  quantity  was  now  worth  Gs.  3d., 
that  the  new  crowns  should  contain  only  about  15T4ff  dwts.,  and  that 
the  shillings  should  contain  proportionably,  that  is,  one-fifth  less  than  the 
old  coinage,  because  he  clearly  saw  that  the  whole  range  of  prices  had 
been  fixed  in  a  money  of  account,  which  had  been  formed  upon  the  depre 
ciated  coins. 

"  Mr.  Lowndes  wished  to  avoid  the  mischief  of  suddenly  wresting  back 
the  money  of  account  from  its  present  adjustment  to  its  former  position: 
'By  this  project,  all  computations  in  pounds,  shillings  and  pence  used  in 
accounts,  and  the  reckonings  by  pounds,  marks,  half  marks,  practised  in 
the  law  of  England,  and  in  the  records,  contracts,  and  other  instruments 
relating  thereunto,  will  be  preserved  as  they  ought  to  be.' l  All  the  con 
tracts  for  many  years  had  been  made  in  the  money  of  account,  as  it  corre 
sponded  with  the  depreciated  coins.  To  require  debts  thus  contracted  to 
be  discharged  in  coins  of  full  weight,  or  their  equivalent,  was  an  injustice 
the  government  could  not  perpetrate ;  and  the  coins  were  called  in,  imper 
fect  as  they  were,  to  be«restored  in  new  coins  of  the  old  weight.  That  only 
met  the  difficulty  to  a  small  extent,  because  much  the  largest  proportion  of 
the  debtors  had  no  coins  in  their  hands  to  be  thus  exchanged.  They  had  to 
sell  goods  to  raise  money,  and  their  goods  would  sell,  of  course,  at  a  depre 
ciation  proportioned  to  the  increased  value  of  the  coins.  This  hardship 
was  strongly  urged  as  an  objection,  but  in  vain,  as  it  was  resolved  by  the 
authorities  that  the  weights  of  the  old  coinage  must  be  preserved.  They 
believed  in  Mr.  Locke's  idea  of  an  equal  quantity  of  silver  being  always  of 
equal  value.  The  money  of  account,  as  understood  and  used  by  the  people, 
was  violated,  and  all  recent  subsisting  contracts  were  in  confusion. 

"  The  true  doctrine  of  money  of  account  applied  to  the  difficulties  of  that 
recoinage,  upon  which  we  have  dwelt  at  more  length,  with  the  view  of 
showing  this  doctrine  more  distinctly,  would  have  settled  at  once  the  chief 
part  of  the  dispute,  and  enabled  them  to  grapple  with  the  real  facts,  unob- 
scured  by  a  cloud  of  misconceptions.  If  the  coins  had  been  as  Mr.  Locke 
contends  they  should  be,  merely  weighed  pieces  of  metal  of  a  certain  standard 
quality,  the  money  of  account  would  have  kept  its  original  adjustment; 
and  if  the  ounce  of  silver,  valued  at  5s.  2<Z.,  had  lost  one-fifth  of  its  weight, 
it  would  have  been  valued  at  4s.  I%d. ;  and  the  gradual  depreciation  would 

1  "  Lowndes'  Essay,"  &c.,  page  85.     Lowndes  was  Master  of  the  Mint. 


NOTES    TO     CHAPTER    II.  85 

have  been  so  imperceptible  in  the  course  of  a  series  of  years,  as  to  have 
fallen  with  severity  upon  none.  The  money  of  account  would  have  re 
mained  intact,  measuring  and  expressing  the  value  of  the  pieces  of  silver 
and  gold  according  to  their  weight,  with  the  same  precision  and  readiness 
as  other  articles.  In  case  of  a  rise  of  the  precious  metals,  consequent  upon 
a  high  exchange,  the  rise  would  be  at  once  noted  in  the  money  of  account 
without  the  least  confusion  in  any  mind.  The  ounce  of  silver  which  had, 
at  the  ordinary  exchange,  been  rated  at  5,9.  2(7.,  could  as  easily  be  stated  to 
be  worth  5s.  3d.,  5s.  4d.,  or  5s.  10c7.  Under  the  proper  and  unobstructed 
operation  of  a  money  of  account,  the  evil  could  not  have  taken  place :  that 
is,  if  the  weight  and  quality  in  the  first  place  had  been  simply  certified  by 
the  stamp  of  the  mint,  and  the  price  had  been  left  to  the  course  of  com 
merce,  there  would  have  been  no  inducements  to  clipping  or  punching,  as 
the  amount  thus  abstracted  would  have  been  deducted  by  the  first  person 
to  whom  it  would  have  been  offered  ;  and  when  the  actual  wear  began  to 
be  appreciable,  the  loss  would  have  been  deducted  in  all  large  payments. 
In  this  way  the  loss  by  wear,  for  twenty,  thirty  or  fifty  years,  could  never 
be  suddenly  thrown  at  once,  with  all  its  severity,  upon  any  community; 
but  would  be  borne,  in  the  lapse  of  years,  by  several  generations  of  business 
men,  by  such  slow  degrees  as  to  be  imperceptible  as  a  burden.  The  object 
of  a  recoinage  would,  in  such  a  case,  only  be  to  revise  the  standard  of 
quality,  detect  adulterations,  and  by  the  re-issue  of  pieces  newly  weighed 
and  stamped,  to  save  the  people  the  trouble  of  weighing  and  assaying.  To 
this,  neither  Mr.  Locke  nor  Mr.  Lowndes,  and  those  agreeing  with  them, 
could  have  made  objection,  if  they  had  once  perceived  the  efficiency  and 
utility  of  an  undisturbed  money  of  account.  It  would  have  explained  nearly 
every  point  of  difference  between  them,  saved  the  government  10  per  cent, 
on  the  recoinage,  prevented  a  great  amount  of  injustice  to  individuals,  and 
preserved  the  money  of  account  at  its  then  adjustment.  It  would  have 
pleased  Mr.  Locke  to  have  the  precious  metals  issued  by  weight  and  quality 
only;  and  it  would  have  pleased  Mr.  Lowndes  to  have  retained  the  signifi 
cance  of  pounds,  shillings  and  pence  unchanged,  as  then  employed  to 
express  the  value  of  all  the  commodities  of  trade/' 

"  We  may  aptly  introduce  here  a  passage  from  a  work  on  *  Coin  and 
Coinage,'  l  which  denotes  a  clearer  conception  of  this  subject  than  any  to 
which  it  was  the  fortune  of  Mr.  Locke  to  attain.  '  For  all  exchange  is 
either  by  the  actual  or  intellectual  valuation  of  money  ;  that  is  to  say, 
either  the  thing  is  exchanged  for  money,  or,  if  it  be  exchanged  for  another 
thing,  the  measure  of  that  exchange  is,  how  much  money  either  of  the 
things  exchanged  is  conceived  to  be  worth  ;  and  practice  hath  found  out 
that  in  value,  which  geometricians  have  found  out  in  quantities,  that  two 
lines  which  are  equal  to  a  third  line,  are  equal  to  one  another;  so  the 


1  By  Rice  Vaughan,  page  3.     London,  1675. 


86  NOTES    TO    CHAPTER    II. 

money  is  a  third  line,  by  which  all  things  are  made  equal  in  value/  Money 
of  account  is  the  line  or  medium  of  comparison  by  which  values  are  com 
pared,  stated,  expressed,  and  by  which  parties  discharge  their  debts,  by 
delivering  as  many  goods  into  the  channels  of  commerce  as  they  take,  'by 
which  all  things  are  made  equal/ 

"In  the  controversy  which  grew  out  of  the  famed  Bullion  Report  of  1810, 
Mr.  Iluskisson  published  a  pamphlet,  '  The  Question  concerning  the  Depre 
ciation  of  the  Currency  Stated  and  Examined,'  ably  sustaining  the  doctrines 
of  that  report,  for  which  he  was,  as  an  acting  member  of  the  committee, 
responsible.  That  dispute  was  waged  among  scores  of  writers  on  grounds 
on  which  it  was  impossible  they  could  arrive  at  any  just  conclusion.  One 
party  contended  that,  owing  to  the  long  continued  wars  of  the  French 
Revolution  and  of  Napoleon,  the  demand  for  gold  on  the  continent  became 
extraordinary,  as  on  such  occasions  it  always  does,  and  that,  in  consequence, 
it  had  risen  in  value.  The  other  maintained,  that  the  bank  paper,  which 
was  the  general  currency,  had  depreciated  to  the  extent  of  the  apparent 
difference  between  them.  Gold  was  quoted  occasionally  as  high  as  £5  4s. 
—  the  usual  price  being  <£3  17s.  10  *>•«£.  per  ounce.  The  testimony  of  mer 
chants,  taken  before  the  committee,  decidedly  sustained  the  views  of  the 
first,  that  gold  had  risen.  But  those  who,  like  Locke,  were  unable  to  sepa 
rate  the  idea  of  money  from  gold  or  silver,  concluded  that,  as  an  ounce  of 
gold  was  always  equal  to  itself,  it  must  always  be  of  the  same  value  ;  and 
that,  as  a  pound  sterling  is  the  '  unambiguous  name  of  a  certain  quantity 
'of  coined  gold  or  silver,'  the  paper  must  have  depreciated,  as  the  gold  could 
not  rise  in  value.  No  force  of  argument,  no  array  of  facts,  could  move 
them  from  this,  as  they  regarded  it  impregnable  ground.  It  was  shown 
that  other  articles  had  not,  like  gold,  risen  in  comparison  with  paper;  that 
silver  had  not ;  and  that  parties  were  in  constant  pursuit  of  the  gold  for 
exportation.  All  in  vain  ;  for,  in  the  view  of  the  bullionists,  a  pound  denoted 
a  certain  quantity  of  gold ;  and  however  much  that  gold  might  be  in  de 
mand,  it  could  never  be  more  valuable  than  itself.  Mr.  Iluskisson,  with  far 
more  knowledge  of  the  subject  than  Mr.  Locke,  could  not  escape  from  the 
blinding  effects  of  this  error.  He  was  met  by  numerous  adversaries,  who 
labored  under  other  errors  of  doctrine  or  fact,  which  left  the  question  still 
unsettled.  They  fought  the  battle,  indeed,  on  a  field  where  it  could  never 
be  determined.  The  very  fact  that  such  an  array  of  able  men  applied  their 
powerful  minds,  and  in  numerous  instances  great  practical  knowledge,  to 
the  solution  of  this  question  of  depreciation,  without  full  success  —  for  it  is 
still  a  matter  of  contest  —  proves  there  was  some  lurking  misapprehension 
in  the  minds  of  both  parties,  which  kept  them  from  the  true  point  of  the 
controversy.  The  merchants,  who  contended  that  gold  had  risen  in  value, 
and  that  the  bank-notes  had  not  depreciated  to  the  extent  of  the  apparent 
difference  between  paper  and  gold,  sustained  themselves  by  an  appeal  to 
facts  which  would  have  been  irresistible,  except  to  those  who  could  not 


NOTES     TOG  H  AFTER     II.  bl 

conceive  of  a  difference  in  value  between  a  pound  sterling  and  a  sovereign, 
between  twenty-one  shillings  and  a  guinea.  It  was  useless  to  array  facts 
to  prove  that  two  and  two  did  not  make  four,  for  as  clear  as  that  did  the 
bullionists  conceive  their  position  to  be. 

"In  the  years  1811  and  1812,  two  publications  appeared,  in  which  the 
doctrine  of  money  of  account,  misnamed  Abstract  Currencies,  was  applied 
with  much  discrimination  and  clearness  to  this  question.1  No  reader  of 
these  works  can  fail  to  perceive  that  the  elements  introduced  by  them  into 
the  discussion  are  indispensable  to  a  fair  understanding  of  the  subject,  and 
especially  to  a  safe  solution.  It  was  shown  that  gold  had  risen,  and  that 
the  money  of  account,  which  continued  to  correspond  with  the  bank  paper, 
measured  that  rise  in  value.  As  soon  as  the  paper  ceased  to  be  convertible 
into  gold,  it  ceased  to  fluctuate  in  value  with  gold,  and  became  a  medium 
of  exchange  or  currency,  of  which-  the  money  of  account  was  the  expres 
sion.  But  we  can  neither  quote  from  the  close-woven  pages  of  Mr.  Wilson, 
nor  attempt  an  abstract,  as  he  follows  up  the  thread  of  fallacy  alleged  to 
run  through  the  doctrines  and  arguments  of  the  bullionists  with  a  steady 
perseverance,  and  in  such  an  unbroken  chain,  that  it  is  difficult  to  detach  a 
link.  No  mind  open  to  the  truth,  and  sufficiently  disciplined  to  the  labor 
of  close  investigation,  can  read  these  pages  without  perceiving  that  the  doc 
trine  of  an  abstract  money  of  account  has  found  an  advocate  few  would 
venture  to  assail,  or  could  hope  to  overcome.  We  are  not  aware  that  any 
reply  to  Mr.  Wilson's  publications  ever  appeared. 

"  We  cannot  omit,  in  our  mention  of  those  who  have  supported  the  true 
idea  of  a  money  of  account,  a  publication  which  appeared  in  Philadelphia, 
in  1832.2  In  this  pamphlet  the  whole  subject  is  ably  and  fully  handled. 
and,  as  a  single  treatise  on  this  subject,  is  more  suited  for  popular  reading 
than  any  yet  published.  In  summing  up  his  conclusions  at  page  62,  he 
lays  it  down :  «  That  value  in  exchange  was  originally  altogether  compara 
tive  ;  one  article  being  compared  with  another.  That,  to  enable  this  to  be 
done,  it  was  found  absolutely  necessary  to  assume  an  intermediate  imagi 
nary  point  of  comparison,  and  that  this  point  of  comparison  is  to  be  found 
in  use  in  all  countries.'  lie  says  this  is  used  to  express  the  value  of  coin, 
as  well  as  of  other  commodities.  He  compares  it  to  the  assumed  point  in 
algebra;  to  the  imaginary  points  of  the  north  and  south  poles;  to  the 
imaginary  line  which  is  drawn  for  the  meridian  ;  to  the  degrees  of  latitude 
and  longitude.  By  these  lines  ships  are  guided  thousands  of  miles  over  a 

1  "  Defence  of  Abstract  Currencies  in  reply  to  the  Bullion  Report  and  Mr.  Huskis- 
Bon:"  By  Gloucester  Wilson,  Esq.,  F.  R.S.  London,  1811.  "A  Further  Defence  of 
Abstract  Currencies  :"  By  the  same.  1812.  Mr.  Wilson  was  a  barrister. 

1  From  the  press  of  Jesper  Harding :  Svo.  pp.  76.  The  copyright  is  secured  by 
Thomas  Smith.  The  pamphlet  is  otherwise  anonymous,  but  in  the  introduction  the 
writer  speaks  of  himself  as  a  foreigner.  Can  he  be  the  same  Thomas  Smith  whoso 
works  on  the  Theory  of  Money  we  have  already  noticed?  Ante,  note,  page  G<". 


88  NOTES    TO    CHAPTER    II. 

trackless  ocean,  and  an  unerring  account  of  the  track  is  kept ;  and  few 
ship-owners  would  be  willing  to  intrust  the  care  of  a  ship  to  a  master  who 
should  declare  that  he  would  take  no  charts  to  sea,  as  they  were  nothing 
but  imaginary  lines  drawn  upon  paper.1 

"We  find  a  clear  expression  of  the  doctrine  of  money  of  account  in  a 
report  made  to  Congress  in  the  session  of  1830-1.  '  Nations  generally  esta 
blish  a  measure  of  value,  founded  upon  an  ideal  unit  or  money  of  account 
and  contract.  Coins  regulated  in  conformity  to  this  standard  usually  com 
pose  the  metallic  currency,  and  they  are  generally  the  only  legal  tender  in. 
payments.  The  stamp  set  upon  the  metal  is  the  seal  of  the  State,  certify 
ing  as  to  the  fineness  and  weight  of  the  coin  ;  and  the  money  unit,  or  its 
integral  parts  or  multiples,  being  exhibited  in  every  coin,  facilitates  enume 
ration,  exchanges  and  payments/  &c. 

"  There  is  a  point  in  the  history  of  our  government  from  which  this  sub 
ject  can  be  studied  with  advantage.  The  subject  of  the  establishment  of  a 
mint  was  brought  to  the  notice  of  Congress  as  early  as  1782,  by  Robert 
Morris,  '  financier'  to  the  confederation,  in  a  report  submitted  by  him  on 
the  15th  of  January  of  that  year.  This  was  not  acted  upon,  and  the  sub 
ject  was  referred  to  Alexander  Hamilton,  Secretary  of  the  Treasury,  in 
April,  1790,  who  submitted  an  elaborate  report  on  the  28th  of  January, 
1791.  These  important  papers  are  accompanied  by  extended  notes  of  Mr. 
Jefferson,  as  they  are  found  at  large  in  American  State  papers,  vol.  vii.,  fol. 
ed.,  p.  91.  No  previous  coinage  of  any  importance  had  existed  in  the 
colonies;  Spanish  coins  were  almost  the  only  kind  in  circulation;  an  ex 
cessive  derangement  in  the  money  of  account  in  the  different  colonies  had 
occurred;  and  the  fact  was  constantly  exhibited  of  merchants  counting 
by  pounds,  shillings  and  pence,  and  paying  in  Spanish  coins.  This  was 
felt  to  be  very  inconvenient,  after  the  affairs  of  the  Revolution,  and  the  sub 
sequent  intimate  connection  of  the  colonies,  had  blended  their  business,  and 
increased  their  mutual  trade.  The  desire  for  a  uniform  system  became  general. 
It  is  evident,  from  the  whole  tenor  of  the  documents  last  referred  to,  that 
these  eminent  men  understood  clearly  enough  the  distinction  between  the 
money  of  account  and  money  in  coins.  Mr.  Morris  desired  to  retain  the 
moneys  of  account  strictly  as  they  then  were,  and  sought  a  unit  for  the  con 
templated  coinage,  which  would  be  a  common  divisor  for  all.  This  divisor 
•was  the  l-440th  part  of  a  dollar,  of  which  24  would  be  a  penny  of  Georgia, 
15  of  New  York  and  North  Carolina,  20  would  be  a  penny  of  Virginia  and 
New  England,  and  16  a  penny  of  Pennsylvania,  &c.  His  coinage  was  to 
be  founded  on  this  minute  unit,  as  follows :  — 

1  There  is,  in  all  this  illustration,  the  want  of  a  clear  statement  that  the  unit  must 
have  an  ascertained  power  or  value,  derived  in  the  first  instance  from  articles  used  as 
money,  and  from  that  fixed  by  use  in  the  minds  of  the  people. 


NOTES    TO    CHAP  TEH    II.  89 

10  units  to  be  equal  to  one  penny. 

10  pence     "  "  one  bit. 

10  bits        "  "  one  dollar. 

10  dollars  "  "  one  crown. 

This  dollar  would  have  been  two-thirds  of  the  Spanish  dollar.  Under  this 
coinage,  it  was  supposed  the  people  would  continue  their  old  habit  of  count 
ing  and  estimating  by  pounds,  shillings  and  pence,  and  that  the  new  coins 
would  be  valued  in  the  same  way  as  the  Spanish  coins  had  long  been.  Mr. 
Morris  understood  the  difficulty  with  which  people  changed  their  habits 
of  mental  reckoning  and  fixing  prices,  and  therefore  deemed  it  safer  to 
change  the  coins  than  the  money  of  account,  even  though  the  systems  in 
the  several  States  were  so  various.  His  coins  were  not  only  to  be  paid  as 
equivalents  in  value,  but  convenient,  in  small  transactions,  as  counters  or 
assistants  in  reckoning,  from  their  decimal  subdivision,  and  from  carrying 
on  their  face  evidence  of  weight  and  quality. 

"Mr.  Hamilton  expressly  recognises  the  distinction  between  the  unit  of 
the  money  of  account,  which  he  says,  is  '  the  pound  in  all  the  States/  and 
the  '  unit  of  the  coins/  which  is  'not  so  easy  to  pronounce/  but  which  he 
considers  to  be  the  dollar.  He  recommends  the  adoption  of  the  dollar  as 
the  unit  of  the  coins  as  well  as  of  the  money  of  account,  the  more  especially 
as  the  people  were  prepared  for  it  by  the  circulation  of  the  Spanish  coins, 
and  by  many  of  the  financial  operations  of  the  Revolution.  Mr.  Jefferson 
coincided  with  the  Secretary  of  the  Treasury,  and  recommended  the  adop 
tion  of  the  dollar  unit,  and  the  coins  issued  ever  since.  'A  required  condi 
tion  of  the  unit  is,  that  its  multiples  and  subdivisions  coincide  in  value  with 
some  of  the  known  coins  so  nearly,  that  the  people  may,  by  a  quick  refer 
ence  in  the  mind,  estimate  tlieir  value ;  and,  if  this  be  not  attended  to,  they 
will  be  very  long  in  adopting  the  innovation,  if  ever  they  adopt  it/ — lAm. 
State  Pap.,  Finance,'  vol.  vii.,  p.  105.  '  The  unit  or  dollar  is  a  known  coin, 
and  the  most  familiar  of  all  to  the  minds  of  the  people.  It  is  already 
adopted,  from  North  to  South,  and  therefore  offers  itself  as  a  unit  already 
introduced.  Our  public  debt,  our  requisitions  and  their  apportionments, 
have  given  it  actual  and  long  possession  of  the  place  of  unit/  — '  Ibid.  Fi 
nance,'  vol.  iii.,  p.  105. 

"These  valuable  papers  clearly  recognise  the  distinction  between  the 
functions  of  a  money  of  account  and  a  coinage,  though,  in  many  respects, 
there  is  a  want  of  that  precision  in  their  views,  which  nothing  but  a  long 
familiarity  with  the  subject  could  give.  Hamilton  and  Jefferson  seem  to 
take  it  for  granted  that  the  coins  should  correspond  with  the  unit  of  account. 
Morris  did  not  deem  that  necessary,  because,  undoubtedly,  he  understood 
the  matter  better  than  either  of  them.  For  want  of  knowing  more,  how 
ever,  his  plan  was  certainly  inferior,  on  the  whole,  to  that  they  proposed. 
It  would  have  been  a  happy  time  to  adopt  a  coinage  recommended  since 
and  before,  by  many  eminent  men.  The  standard  of  quality  being  fixed, 


90  NOTES     TO     CHAPTER     II. 

the  precious  metals  to  be  coined  into  Troy  pounds  and  decimal  parts  of  a 
pound,  ounces  and  parts  of  an  ounce,  and  the  dollar  being  adopted  as  the 
unit  of  account,  with  a  decimal  subdivision,  these  pieces  of  the  precious 
metals  would  be  readily  valued  in  this  money,  following  all  these  fluctua 
tions.  A  coinage  intended  specially  for  small  transactions  of  half-dollars 
and  under,  would  have  been  advisable  to  be  a  legal  tender,  not  beyond  ten 
dollars.  The  fact  that  the  legal  tender  of  gold  or  silver,  in  large  transac 
tions,  is  a  very  rare  occurrence  —  few  people  having  ever  seen  it  resorted 
to  —  shows  that  it  should  not  be  the  rule,  but  the  subject  of  exceptional 
regulation.  The  precious  metals  finding  their  value  according  to  the  mar 
ket,  could  not  disturb  the  steadfastness  of  the  unit  of  account,  which  would 
perfectly  register  and  express  every  variation  in  them." 


III. 

EXTRACTS 

From  an  Article,   ~by  Hie  Auilior  of  tins    Volume,  in  "Hunt's  Merchants' 
Magazine,"  of  April,  1852. 

MONEY    OF   ACCOUNT ITS    NATURE    AND    FUNCTIONS. 

"  WHEN  an  Englishman  visits  the  continent,  he  carries  in  his  mind  his 
own  money  of  account,  and  by  its  aid  values  every  coin  he  meets ;  he  ex 
presses  that  value  in  the  terms  which  are  most  familiar  to  him:  thus  the 
foreign  price  of  every  article  can  only  be  realized  when  mentally  turned  into 
pounds,  shillings  and  pence.  _  The  foreign  coins  he  carries  in  his  pocket 
are  all  measured  in  that  way,  and  it  will  require  a  long  familiarity  with 
foreign  prices  before  he  can  think  in  any  money  of  account  but  his  own. 
The  mental  operation  is  similar  to  what  he  uses  in  learning  to  speak  a 
foreign  language ;  he  thinks  first  in  his  own  what  he  may  express  after 
wards  in  a  foreign  tongue.  If  the  English  traveller  is  familiar  with  the 
home  prices  of  articles  submitted  to  him  abroad,  he  will,  without  hesitation, 
annex  prices  to  all  the  foreign  goods  he  sees  in  English  money  of  account. 
He  does  not,  in  this  instance,  use  his  domestic  coins  as  a  measure  of  value; 
the  operation  of  fixing  such  prices  is  not  a  comparison  of  his  domestic 
coins  with  the  foreign  goods ;  it  is  the  expression  of  their  value  in  English 
money  of  account. 

"During  the  time  of  the  suspension  of  payments  by  the  Bank  of  Eng 
land,  between  1797  and  1822,  such  was  the  demand  for  gold  on  the  conti 
nent,  for  army  purposes,  that  it  became,  for  most  of  that  period,  merely  an 
article  of  commerce,  in  great  demand  for  export."  .  .  . 

It  must  be  perfectly  plain  to  those  who  are  familiar  with  the  history 


NOTES    TO     CHAPTER    II.  91 

of  that  period,  that  if  every  coin  of  gold  and  silver  had  been  swept  by  the 
foreign  demand  from  that  country,  the  people  would  not  the  less  have  con 
tinued  to  transact  their  business  and  make  payme'nts  in  pounds,  shillings 
and  pence.  So  they  would  have  done,  also,  if  platina  had  been  introduced 
as  a  medium  of  payment.  A  whole  generation  of  men  came  into  business 
during  this  suspension,  who  were  not  familiar  with  coins,  and  seldom  even 
saw  a  guinea  or  a  sovereign  ;  yet  they  never  had  any  difficulty  in  buying 
and  selling  by  pounds,  shillings  and  pence.  Did  they,  in  every  instance, 
use  coin  as  their  measure  of  value? 

"  Does  the  active  salesman,  who  is  continually  naming  prices  from  morn 
ing  to  night,  carry  the  image  of  the  silver  dollar  in  his  mental  vision  all  the 
time  ?  Suppose,  when  he  pronounces  the  price  of  a  bale  of  goods  to  be  two 
hundred  dollars,  that  amount  of  silver  coins  were  thrown  before  his  asto 
nished  vision,  he  would  be  very  apt  to  say:  'Carry  them  to  the  bank  or  the 
broker;  I  am  no  judge  of  coins;  they  may  be  too  light,  or  they  may  be 
counterfeit,  for  aught  I  know/  The  purchaser  may  reply  :  '  Take  them  by 
weight,  and  return  any  that  may  be  condemned  as  false  coins/  But  the 
answer  would  be,  in  almost  every  such  instance :  '  I  know  not  the  value  of 
a  pound,  ounce,  pennyweight,  or  grain  of  silver/  Did  this  merchant  mea 
sure  the  value  of  his  goods  by  coins  ?  Let  us  suppose  this  lot  of  miscella 
neous  coins  to  be  carried  to  the  counter  of  a  dealer  in  the  precious  metals ; 
it  will  be  immediately  inspected,  classed  and  valued  in  dollars,  precisely  as 
the  merchant  valued  his  goods.  Some  dollar  coins  may  be  worth  one  dol 
lar,  and  one,  two  or  three  cents ;  some  worth  one,  two  or  three  cents  less 
than  a  dollar :  the  various  classes  into  which  they  may  be  assorted  will  be 
separately  valued,  and  the  whole  being  added  together  will  make  the  sum 
which  the  broker  is  willing  to  give  for  the  lot.  It  is  soon  sold  and  paid  for 
by  a  check  on  the  bank,  which  pays  the  merchant  for  his  goods.  Now, 
was  not  this  parcel  of  coins  valued  in  the  same  way  as  the  box  of  prints, 
and  were  riot  both  equally  indebted  to  the  efficiency  of  the  money  of  account? 

"  If  it  be  alleged  that  the  merchant  and  broker  had  each  a  reference,  in 
their  minds,  for  the  purpose  of  expressing  their  several  valuations,  to  per 
fect  dollars,  we  ask  how  they  could  thus  carry  the  idea  of  a  dollar  so  per 
fectly  as  to  exceed  in  accuracy  the  ordinary  coins  of  circulation.  If  men 
can  carry  the  value  of  the  perfect  coin  in  their  minds,  then  that  is  what  is 
called  '  imaginary  money/  or  money  of  account,  by  the  Cambist. 

"  Take  another  case  of  a  bale  of  goods,  priced,  sold,  and  paid  for,  in  what 
appear  to  be  new  and  perfect  dollars.  It  would  be  said,  by  those  who  take 
that  view  of  the  subject,  that  the  value  of  the  goods  was  measured  by  the 
coins  which  were  used,  as  an  equivalent  in  paying  for  them.  But  the  coins 
are  all  counterfeit,  and  so  perfect  that  they  circulate  a  long  time,  perform 
ing  all  the  functions  of  money,  without  injury  or  loss  to  any  one  except 
those  in  whose  hands  the  false  coins  are  at  last  detected.  In  this  instance, 
every  article  paid  for  in  these  coins  would  have  been  valued  in  false  money; 


92  NOTES    TO     CHAPTER    1 1. 

and  as  every  dollar  might  have  been  paid  a  hundred  times  without  injury 
to  any  except  the  last  holder,  the  rather  strange  conclusion  must  be  drawn, 
that  false  coins  are  equally  efficient  in  measuring  value  with  the  genuine. 
This  will  hardly  be  admitted,  and  we  are  driven  to  the  conclusion  that  it  is 
the  ideal  dollar  of  our  money  of  account  —  the  value  of  our  money  unit 
clearly  understood  and  firmly  settled  in  the  minds  of  the  people  —  that  is 
applied  without  hesitation  at  all  times,  and  by  everybody,  to  measure  the 
value  of  every  article  of  sale,  or  susceptible  of  valuation,  whether  goods, 
coins  or  bullion. 

"  Our  ancestors  brought  with  them  to  America  the  English  money  of 
account,  and  their  posterity  continued  thus  to  employ  it  until  the  present 
system  was  adopted  by  our  government  after  the  Revolution.  But  a  money 
of  account  cannot,  even  by  legislative  authority,  be  created  nor  destroyed 
in  a  day.  The  English  money  of  account  maintained  its  supremacy  in 
terms,  though  greatly  changed  in  signification,  through  a  long  period, 
although  almost  the  only  coins  in  circulation  were  Spanish  dollars,  and 
halves,  quarters,  eighths,  and  sixteenths."  —  "It  is  }'et  partially  used  in  the 
interior  of  Virginia,  South  Carolina,  and  perhaps  Massachusetts.  In  New 
York  the  term  shilling  holds  its  ground  generally  to  this  day,  owing,  in 
part,  to  the  shilling  there  corresponding  in  value  with  the  Spanish  eighth 
of  a  dollar.  These  colonial  denominations  varied  so  much,  that  in  Massa 
chusetts  a  half-dollar  coin  was  valued  at  three  shillings ;  in  New  York,  at 
four  shillings  ;  and  in  Pennsylvania,  at  three  shillings  and  ninepence.  A 
merchant  of  the  last-named  State  was,  sixty  years  since,  just  as  prompt  in 
affixing  prices  to  his  goods  as  one  of  the  present  day  ;  the  former  could 
employ  the  Pennsylvania  currency  just  as  readily  as  he  of  this  day  uses 
dollars  and  cents.  The  former  had  in  his  mind  no  coin  corresponding  with 
his  pound,  his  shilling,  or  his  penny.  There  \vas  no  such  coin:  nor  could 
he  have  in  his  mind,  as  the  measure  of  value,  any  corresponding  weight  of 
silver  or  gold,  because  very  few  indeed  knew  the  value  of  either  metal  by 
weight.  It  is  impossible  to  think  or  say  that  the  merchants  of  that  day 
measured  or  estimated  the  value  of  their  goods  by  mental  or  actual  refer 
ence  to  coins,  for  there  was  then  none  such,  and  never  had  been.  This 
colonial  money  of  account  was  a  purely  ideal  scale,  the  power  or  value  of 
which  was  fixed  in  the  minds,  and  its  use  in  the  habits  of  people.  What 
was  so  long  true  of  our  colonial  currency,  is  to  this  day  true  of  the  Cana 
dian  money  of  account,  which  has  no  corresponding  coin  —  the  British  shil 
lings,  and  Spanish  and  American  coins  circulating  there,  not  corresponding 
with  their  money  unit.  It  is  worthy  of  remark,  too,  that  the  French  popu 
lation  of  Canada  still  preserve  the  money  of  account  which  their  ancestors 
brought  over  with  them,  and  which  has  long  been  out  of  use  in  France, 
namely,  livres,  sous  and  deniers.  There  have  been  no  coins  corresponding 
with  this  unit  and  its  parts  to  keep  up  the  memory  of  this  money  of  account, 
to  confirm  its  use,  or  to  explain  its  meaning. 


NOTES    TO    CHAPTER    II.  93 

"  It  would  be  endless  to  bring  illustrations  of  our  meaning  from  the 
moneys  of  account  of  Europe  and  Asia,  as  every  country  where  industry 
has  flourished,  or  commerce  been  active,  furnishes  proof  that  the  same 
habit  of  converting  the  denominations  of  coins  into  a  mental  scale,  for  com 
paring  and  expressing  values,  prevails  everywhere  —  in  China  and  Persia, 
and  the  East  Indies — equally  as  in  the  more  civilized  nations  of  Europe. 
China  has  no  coinage,  and  gold  and  silver  are  there  sold  constantly  at  their 
market  value,  and  weighed  out  in  payments,  the  amounts  of  which  are 
expressed  in  the  money  of  account. 

"But  we  need  not  continue  these  details  further,  at  this  stage  of  our  in 
quiry.  It  is  proper  to  say  that  we  do  not  bring  forward  this  use  of  the 
money  of  account  as  a  standard  of  value,  or  as  what  some  have  called  an 
abstract  currency.  It  is  no  standard  of  value,  nor  is  it  a  standard  of  any 
kind ;  nor  can  it,  without  an  abuse  of  terms,  be  called  a  currency.  Its  use 
neither  dispenses  with  a  standard  of  coinage,  nor  with  devices  for  payment, 
institutions  of  credit,  nor  a  paper  currency.  It  is  the  popular  expression 
of  value.  Coinage  furnishes  the  legal  equivalent. 

"  A  money  of  account,  well  established  in  the  habits  and  minds  of  the 
people,  is  a  thing  of  slow  growth,  and  cannot,  therefore,  be  created  by  law. 
Our  National  Legislature  enacted  that  the  dollar  should  be  the  unit  of  our 
money  of  account,  and  immediately  the  public  accounts  were  translated 
into  dollars  and  cents;  but  many  years  elapsed  before  dollars  and  cents  be 
came,  in  fact,  the  money  of  account  —  the  popular  measure,  or  scale  of 
value,  in  the  sense  in  which  we  use  the  term.  If  Congress  were,  by  another 
act,  to  require  that  all  business  should  be  transacted  in  francs  and  centimes, 
it  would  require  nearly  half  a  century  to  make  the  change  in  the  minds  of 
the  people.  So  far  as  legislation  is  concerned,  such  a  change  could  be 
made  in  a  day  ;  but  long  familiarity  with  the  terms,  in  all  the  circles  of  in 
dustry  and  the  avenues  of  trade,  can  only  establish  the  precise  power  and 
force  of  these  terms  in  the  minds  of  the  masses. 

"  If  we  reflect  that  the  annual  product  of  our  industry,  agricultural  and 
manufacturing,  in  the  United  States,  exceeds  three  thousand  millions  in 
value,  and  that,  on  the  average,  these  products  are  sold  many  times,  and 
that  this  mighty  mass  of  valuables  is,  to  its  whole  extent  and  in  all  its  parts, 
put  at  prices  fixed  in  our  money  of  account,  and  that  an  incessant  valuation 
is  going  on  in  the  infinite  operations  of  trade  and  industry,  we  must  admit 
that  anything  which  introduces  confusion  into  such  an  immensity  of  busi 
ness  must  be  an  incalculable  evil.  It  falls  for  short  of  the  reality,  if  we  esti 
mate  the  successive  valuations  or  prices  fixed  on  goods  sold  and  unsold 
every  month,  in  the  United  States,  at  over  a  thousand  millions.  A  mis 
take  of  one  per  cent,  on  this  vast  sum  would  be  a  disturbance  on  the  whole 
to  the  extent  of  ten  millions.  If  our  government  were  to  require  us  hence 
forth  to  keep  our  accounts  in  francs  and  centimes,  making  no  other  change 
in  our  money  system,  the  disturbance  created  would  be  a  matter  of  incoa- 


94  NOTES    TO     CHAPTER    II. 

venience,  the  amount  of  which  must  be  measured  by  the  immense  transac 
tions  it  would  affect,  and  the  necessity  of  converting  such  an  infinity  of 
sums  of  money  from  dollars  into  francs.  But  the  change  would  not  be  con 
fined  to  mere  inconvenience,  for  many  of  the  ignorant,  the  dull,  and  the 
unwary  would  become  the  prey  of  the  designing  and  crafty.  There  can, 
of  course,  be  no  adequate  estimation  of  the  mischiefs  which  such  a  change 
of  our  money  unit  would  inflict;  and  surely  nothing  can  justify  such  legis 
lation,  except  greater  evils  were  threatened  from  the  other  side.  The 
grounds  of  our  national  adoption  of  the  dollar  unit  were  not  merely  its  con 
venience  and  superiority ;  for,  strong  as  are  these  reasons,  they  might  have 
failed  to  overcome  the  opposition  to  a  change ;  it  was  the  necessity  of  har 
monizing  the  differences  of  the  money  of  the  several  States,  which  made 
the  adoption  of  a  new  unit,  which  should  be  common  to  all  the  States,  a 
matter  of  imperative  obligation.  And  the  free  communication  among  the 
States,  with  different  modes  of  computation,  having  among  them  the  same 
legal  money  unit,  was  what  efficaciously  hastened  a  complete  compliance 
with  the  law.  The  new  money  of  account  was  a  language  into  which  all 
the  varying  languages  of  computation  could  be  translated.  When  men  of 
Massachusetts  and  Pennsylvania  were  accounting  together,  instead  of  a 
mutual  transfer  of  their  accounts  into  their  respective  currencies,  they  were 
both  changed  into  federal  money,  and  thus  adjusted.  The  necessity  of 
doing  this  constantly,  among  those  residing  in  different  States,  greatly 
assisted  and  hastened  that  otherwise  slow  process  of  displacing  one  money 
of  account  by  another.  The  inconvenience  was  less  felt  and  complained  of, 
because  it  was  really  not  so  great  as  that  which  they  endured  under  the  old 
•diversified  systems. 

Disturbance  of  the  Money  of  Account  by  open  and  by  concealed  attacks. 

"But  if  the  change  of  a  money  unit,  under  the  most  favorable  circum 
stances,  and  for  the  strongest  reasons,  is  productive  of  so  much  inconve 
nience  to  all,  and  risk  of  imposition  upon  the  unskilful  and  unwary,  what 
must  be  the  effect  where  the  change  is  not  merely  from  one  unit  to  another, 
but  a  concealed  or  unseen  attack  upon  the  unit  itself?  what  the  effect, 
if  resulting  from  the  enforcement  of  such  regulations,  as  tend  to 
change  the  value  of  the  unit,  aud  produce  confusion  in  regard  to  it  in  the 
minds  of  those  employing  it?  Instances  of  this  kind  of  change  are  but 
too  familiar  to  readers  of  the  histories  of  European  countries,  in  the  frauds 
perpetrated  by  mistaken  or  unscrupulous  rulers,  in  the  successive  debase 
ments  of  the  current  coins.  In  England  this  has  been  done  until  the  equiva 
lent  of  the  money  unit  five  hundred  years  ago,  and  that  of  the  present  day, 
is  as  thirty-two  to  ninety-nine:  they  coined  originally,  including  the  alloy, 
£1  Is.  4d.  from  a  pound  of  silver ;  since  1810,  they  coin  £3  6s.  from  that 
quantity  of  silver.  In  France,  the  debasement  has  proceeded  so  far  as  the 
rate  of  seventy  to  one.  The  evils  and  losses  inflicted  upon  the  respective 


NOTES    TO     CHAPTER    II.  95 

countries  in  which  these  abuses  were  practised  can  never  be  adequately 
estimated.  Measured  by  the  mere  inconvenience  they  imposed,  great  as 
that  was,  no  just  idea  of  the  mischief  could  be  attained.  A  more  correct 
estimate  may  be  drawn  from  the  cries  of  distress  which  came  from  all 
quarters  on  the  occasion  of  these  debasements.  Volumes  might  be  filled 
with  the  complaints  caused  by  the  iniquities  of  this  process  of  debasement. 
In  France  a  heavy  tax  was  agreed  to  be  paid  on  condition  the  coinage  was 
permitted  to  remain  undisturbed.  It  is  true  that,  in  the  periods  when  these 
debasements  were  most  resorted  to  as  a  means  of  raising  money,  neither 
rulers  nor  subjects  fully  understood  the  true  nature  of  the  evil,  although  its 
results  were  felt  by  those  whom  they  affected,  so  as  to  leave  no  doubt  about 
the  injury.  The  functions  of  a  money  of  account  were  not  known,  as  they 
are  not  sufficiently  appreciated  even  to  this  time.  The  whole  of  the  mis 
chief  was,  in  those  cases,  imputed  to  the  change  of  the  coinage,  because 
that  was  the  occasion.  No  debasement,  however  great  or  well  managed, 
could  much  injure  those  who  were  knowing  enough  to  detect  the  fraud,  or 
in  a  position  to  discover  it.  They  could  readily  perceive  that  the  new 
coin  which  purported  to  be  a  shilling,  and  which  the  authorities  required 
to  be  so  called,  was  in  fact  worth  only  ten  pence ;  and  they  could  take  their 
precautions  accordingly.  But  the  mass  of  the  people,  who  could  not  dis 
tinguish  the  shilling  of  their  money  of  account  from  a  shilling  coin,  would 
continue  to  count,  and  fix  their  prices,  and  make  their  sales  in  the  usual 
shilling  of  account,  and  receive  payment  in  the  debased  coin.  Their  eyes 
would  only  be  opened  after  the  fraud  was  complete,  and  after  the  perpe 
trators  had  extracted  a  large  sum  from  the  public ;  and  after  merchants 
and  bankers,  shrewd  enough  and  unscrupulous  enough  to  avail  themselves 
of  the  opportunity,  had  levied  a  tenfold  larger  sum.  This  process  of  break 
ing  up  or  destroying  a  money  of  account  is  one  of  fraud  and  misconception, 
where  all  parties  to  a  transaction  are  ignorant  of  what  has  been  done;  they 
speak  in  one  language  —  the  law,  under  which  they  act,  speaks  in  another; 
they  make  their  prices  by  one  scale  —  the  law  exacts  payment  by  another. 
Where,  as  would  soon  be  extensively  the  case,  one  party  comprehended  the 
change,  and  the  other  did  not,  a  direct  advantage  could  be  taken  to  the 
extent  of  the  depreciation.  Such  debasements  destroyed  the  money  of 
account,  because  the  base  coin  was  made  a  legal  tender  for  its  nominal 
amount  of  valuation  in  the  money  of  account.  The  ignorant  and  unwary 
were  therefore  preyed  upon  until  the  extent  of  their  losses  finally  opened 
their  eyes,  and  the  speculation  became  no  longer  available.  The  prices  of 
all  articles  would  become  enhanced  to  the  amount  of  the  debasement,  and 
that  being  the  case,  a  new  money  of  account  would  gradually  be  established, 
as  habit  rendered  the  new  unit  familiar.  It  must  not  be  overlooked,  that 
the  success  of  this  kind  of  fraud  depended  on  the  fact  that  the  money  unit 
in  use,  where  the  fraud  was  attempted,  was  so  firmly  fixed  in  the  minds  of 
the  people,  that  they  would  continue  to  compute  by  it  after  the  alteration 


96  NOTES    TO    CHAPTER    II. 

in  the  value  of  the  coin.  The  success  of  the  fraud  would  come  to  an  ond 
as  fast  as  the  new  money  of  account  replaced  the  old  one.  The  law  which 
made  the  debased  coin  a  tender  at  its  former  value  would  cease  to  be  effec 
tive  when  all  prices  were  fixed  by  the  new  scale.  It  is  well  known  that 
men  of  business  had  such  a  dread  of  the  confusion,  trouble  and  loss  ensuing 
from  a  debasement,  that  they  stood  aghast  at  the  prospect  or  mere  suspicion 
of  such  an  event.1 

Effect  of  a  change  in  the  value  of  the  precious  Metals  on  the  Money  of  Account 
—  Law  of  legal  tender  —  Depreciation  of  Paper  Currency. 

"There  is  another  way  in  which  a  monetary  unit  may  be  changed,  which 
it  is  important  to  consider,  and  that 'is,  by  a  change  in  the  value  of  the  pre 
cious  metals  of  which  the  coins  most  in  use  are  composed.  It  is  by  no 
means  a  necessary  consequence  ;  but  unless  the  danger  is  seen,  and  precau 
tions  taken,  there  is  always  hazard  of  the  money  of  account  being  disturbed 
where  the  ordinary  coins  of  circulation  change  their  value  gradually,  and 
from  causes  not  generally  appreciated.  This  danger  is  always  greater  where 
the  name  of  the  money  unit  is  the  same  with  that  of  the  chief  coin — as  in  the 
case  of  our  two  coins,  gold  and  silver,  each  called  a  dollar.  If  the  silver  in  a 
dollar  coin  should  depreciate  by  degrees  imperceptible  to  the  mass  of  men, 
the  unit  would  alter  by  a  change  following  at  a  long  interval  from  the  de 
preciation.  During  this  time  a  harvest  of  profit  would  accrue  to  those  who 
were  shrewd  enough  to  perceive  the  alteration,  and  fortunate  enough  to  be 
in  a  position  to  avail  themselves  of  it.  Its  operation  would  of  course  be 
very  unequal ;  the  advantage  and  disadvantage  to  some  might  be  equal ; 
many  might  suffer  severely  without  understanding  the  reason  ;  and  some 
might  be  profited  without  knowing  how.  The  whole  mass  of  transactions 
occurring  within  the  range  of  this  depreciation,  the  prices  fixed  upon  all 
commodities  for  sale,  the  contracts  of  sale,  the  actual  payments  in  coin,  the 
whole  position  of  debtors  and  creditors,  their  books  of  account,  evidences  of 
debt  and  securities  of  credit,  would  be  more  or  less  affected.  There  could 
be  no  certainty  that  the  parties  to  these  transactions  perfectly  understood 
each  other.  It  might  very  frequently  be  a  matter  of  accident  or  chance  on 
whose  side  the  advantage  would  fall ;  but  it  would  be  very  certain  that 
those  who  understood  the  process  of  depreciation  would  have  power  to  turn, 
the  whole  event  very  greatly  to  their  profit. 

"We  say  that  the  money  unit  would  suffer  even  where  it  did  not  corre 
spond  in  name  with  any  coin  ;  we  mean,  of  course,  where  there  is  a  fixed 
price  on  the  precious  metals,  and  a  law  of  legal  tender.  Wherever  neither 
of  these  circumstances  exists,  as  in  China,  where  great  fluctuations  in  the 
value  of  gold  and  silver  occur,  there  such  changes  have  no  effect  whatever 

1  See  the  note  at  page  35,  "  Snelling  on  the  Coins  of  Great  Britain,  France,  and 
Ireland." 


NOTES    TO     CHAPTER    II.  97 

upon  the  money  of  account.  In  China,  the  value  of  gold  and  silver  can 
always,  in  any  variation,  be  expressed  in  tales,  mace,  candarines  and  cash; 
and  so  in  England,  if  the  statute  making  gold  a  legal  tender  at  £3  17s.  lOJd. 
were  repealed,  the  value  of  gold  could  be  expressed  under  any  possible  de 
gree  of  variation  in  pounds,  shillings  and  pence.  So,  if  our  law  making 
gold  a  legal  tender  were  repealed,  we  should  have  no  difficulty  in  express 
ing  its  value  in  dollars  and  cents,  at  any  possible  depreciation  to  which  it 
might  descend  under  the  effect  of  the  influx  of  that  metal  from  California 
or  Australia.  But  when  the  law  compels  men  to  take  gold  at  a  fixed  value, 
and  coins  are  issued  in  gold  which  are  made  a  legal  tender  at  one  dollar, 
five,  ten,  and  twenty  dollars,  the  mass  of  men  will  be  slow  to  perceive  any 
depreciation  of  a  coin  which  the  law  holds  at  the  same  value.  They  can 
only  discover  the  change  by  a  long  process  of  selling  at  the  old  value,  and 
being  paid  in  the  new;  whilst  very  few  will  enjoy  the  equivalent  advan 
tage  of  buying  by  the  old  scale,  and  paying  by  the  new. 

"  The  unit  of  valuation  may  be  disturbed  and  destroyed  by  the  deprecia 
tion  of  a  paper  currency  which  enjoys  the  whole  circulation  of  a  country. 
If  such  a  currency  is  once  established  in  the  confidence  of  a  community,  so 
as  to  be  received  in  all  business  transactions  at  par  with  the  unit,  or  as 
equivalent  to  coins  of  known  value,  it  may  decrease  by  such  imperceptible 
degrees,  and  from  such  unseen  causes,  as  gradually  to  cause  a  general  rise 
of  prices  corresponding  to  the  stage  of  depreciation.  This  of  course,  de 
stroys  that  money  of  account,  and  gradually  substitutes  another ;  but  the 
process  is  fraught  with  all  the  mischiefs  and  confusion  attendant  upon  a 
change  in  the  value  of  gold  and  silver. 

"  This  was  that  which  was  alleged  to  have  taken  place  in  England  in  the 
period  of  suspension  of  payments  by  the  bank  between  1809  and  1815, 
when  at  one  time,  as  we  have  already  mentioned,  gold  reached  the  very 
high  price  of  £5  4s.  And  it  is  still  urged  by  some  in  that  country,  that  no 
more  unjust  nor  impolitic  legislation  ever  took  place  than  that  which 
restored  the  unit  of  account  to  its  original  place  compared  with  gold.  But 
the  very  heated  controversy  which  took  place  within  the  period  above-men 
tioned,  is  one  of  those  in  which  the  calm  observer  of  later  days,  looking 
through  a  less  prejudiced  medium,  can  clearly  perceive  that  there  was 
much  truth  and  error  on  both  sides  ;  and  that  their  differences  were  of  a 
nature  that  no  element  employed  in  their  discussion  could  enable  them 
properly  to  reconcile  or  determine  the  preponderance.  No  doubt  there 
was  some  depreciation  of  the  paper  of  the  Bank  of  England,  but  not  by  any 
means  corresponding  to  the  price  of  gold,  the  demand  for  which  was  in 
creased,  owing  to  many  special  causes,  but  chiefly  to  the  wars  raging  on 
the  continent.  After  the  battle  of  Waterloo,  as  the  affairs  of  the  continent 
gradually  resumed  a  state  of  quiet,  gold  fell  by  degrees  to  its  average  mar 
ket  rates. 

"  If  the  strenuous  efforts  which  were  put  forth  at  the  period  of  this  con- 

7 


98  NOTE  STOCK  AFTER    II. 

troversy  had  been  in  part  directed  to  preserve  the  money  of  account  intact, 
rather  than  to  an  angry  and  excited  discussion  upon  the  question  whether 
gold  had  risen  or  bank-notes  had  fallen  in  value,  more  light  would  have 
been  shed  upon  the  subject,  and  more  real  good  accomplished.  The  publi 
cations  of  this  period,  and  the  Parliamentary  reports,  form  the  most  valua 
ble  mine  of  instruction  on  the  subject  of  money  and  credit  anywhere 
extant,  but  far  too  voluminous  to  be  more  than  merely  referred  to  in  this 
connexion. 

"  The  money  unit  of  the  American  colonies  was  destroyed  and  diversified 
by  a  process  the  opposite  of  the  depreciation  of  the  coin.  The  long  con 
tinuance  of  an  unfavorable  exchange  with  England  in  most  of  the  colo 
nies  begot  a  constant  and  pressing  demand  for  coin  as  a  remittance.  The 
exports  of  the  colonies  were  insufficient  to  furnish  bills  of  exchange  for  ad 
justment  of  the  large  indebtedness  to  the  mother  country,  created  by  inces 
sant  over-importation.  The  only  possible  mode  of  discharging  a  large  por- 
.tion  of  this  foreign  debt  was  by  the  exportation  of  coin.  The  demand  thus 
arising  continued  so  long  and  so  urgent,  that  the  value  of  coins  began  and 
continued  to  enhance,  through  a  long  series  of  years ;  the  scarcity  became 
so  great,  that  the  colonists  suffered  severely  for  some  medium  of  exchange, 
and  were  driven  to  various  strange  expedients,  and  not  unfrequently  to  a 
state  of  barter,  in  which  the  commodities  to  be  exchanged  were  valued  in 
the  money  of  account:  that  is,  all  payments  were  made  in  the  commodities 
exchanged,  whilst  all  prices  were  fixed  in  the  money  of  account.  During 
this  period,  Spanish  dollars  and  fractional  coins,  under  this  special  demand, 
rose  in  value,  and  increasing  prices  continued  to  be  expressed  in  the  usual 
money  of  account.  The  dollar,  which  at  first  was  worth  4s.  6d.,  became 
worth  5s.,  5s.  Gd.,  Gs.,  Gs.  Qd.,  7s.,  and  7s.  6d.,  in  Pennsylvania;  and  in 
New  York  it  went  to  8s.  It  is  true  that,  in  some  colonies,  this  process  was 
complicated  with  an  excessive  issue  of  paper  currency.  In  such  cases,  it 
may  not  be  practicable  to  estimate  the  respective  influences  of  the  unfavor 
able  exchange  and  consequent  demand  for  coin  as  an  article  of  export,  and 
that  of  the  over-issue  of  paper  currency ;  but  that  both  causes  had  their 
appropriate  result  is  easily  seen,  and  the  more  especially  as  they  were  not 
always  contemporary.  In  some  of  the  colonies  no  paper  was  issued,  and  in 
them  the  unfavorable  exchange  destroyed  not  less  effectually  the  money 
unit;  and  in  some  of  the  colonies  the  original  money  unit  was  changed 
before  the  issue  of  the  paper  currency.  It  should  be  noted  that  neither  an 
unfavorable  exchange,  nor  an  over-issue  of  bank-notes  necessarily  involve 
the  destruction  of  the  money  of  account.  Where  there  is  a  regular  place 
for  the  transaction  of  exchange,  and  regular  quotations  of  the  rate  of  ex 
change  made  public,  there  the  nature  of  the  demand  for  coin  is  at  once 
seen  and  understood,  and  the  price  of  coins  nearly  keeps  pace  with  the 
price  of  exchange ;  both  coins  and  bills  of  exchange  being  rated,  in  the 
terms  of  the  money  of  account,  at  what  they  were  worth.  There  was  ro 


NOTES     TO     CHAPTER    II.  99 

regular  price  for  exchange,  nor  were  there  regular  dealers  in  exchange  in 
the  early  days  of  our  colonial  existence  ;  and  the  mass  of  the  people  did  not 
comprehend  the  true  nature  of  the  demand  for  coin.  Hence,  as  coins  almost 
disappeared  from  circulation,  and  as  a  high  nominal  price  was  continually 
bid  for  them,  the  prices  of  other  commodities  fell  into  a  state  of  confusion, 
and  all  harmony  of  adjustment  was  gone  ;  for  few  could  tell  whether  prices 
referred  to  an  equivalent  in  coins,  or  an  equivalent  in  other  commodities. 

"  So  irr  the  case  of  paper  issues ;  its  depreciation  does  not  necessarily 
imply  injury  to  the  money  of  account ;  for  where  there  is  good  paper  with 
which  to  make  comparison,  it  may  be  quoted,  paid  and  received  at  any 
rate  of  discount  agreed  upon,  from  1  to  99  per  cent.  —  a  fact  familiar  to  all 
men  of  business  in  the  United  States. 

Glance  at  the  Causes  which  introduced  the  present  Coinage  System  of 
Great  Britain. 

"Before  examining  our  own  system  of  coinage  in  reference  to  modifica 
tions  which  may  seem  to  be  advisable  in  any  aspect  of  the  subject,  it  may 
be  profitable  to  glance  at  the  steps  by  which  Great  Britain  was  led  to  adopt 
the  gold  standard.  Previous  to  that  change,  the  double  standard  had  pre 
vailed,  and  for  more  than  a  century  had  been  a  source  of  perpetual  trouble 
to  individuals,  and  loss  to  the  nation.  The  mischief  began  before  the  com 
mencement  of  the  eighteenth  century,  by  the  rapid  disappearance  of  silver 
from  the  circulation.  This  process  was  due  to  many  causes,  but  chiefly  to 
the  over-valuation  of  silver  at  the  mint  of  France.  This  carried  off  all  the 
heavy  silver  coins,  and  left  those  most  worn  to  perform  an  increased  duty 
in  the  circulation,  whereby  they  very  rapidly  became  more  and  more  de 
faced  and  deficient  in  weight.  The  evil  became,  at  last,  insufferable,  and 
brought  on  a  discussion,  in  the  reign  of  William  and  Mary,  as  to  the  best 
remedy.  In  this  discussion  the  celebrated  John  Locke  took  a  conspicuous 
part.  The  government  —  very  honestly,  as  its  members  thought,  but  very 
unwisely,  as  it  has  since  been  regarded  —  undertook,  in  the  face  of  this 
foreign  demand  for  silver,  to  recoin  the  whole  silver  currency,  and  to  make 
it  of  full  weight,  but  without  due  precaution.  Whilst  this  light  currency, 
depreciated  in  weight  from  10  to  25  per  cent.,  passed  by  tale,  it  could  not 
be  exported,  because  the  over-valuation  was  not  equal  to  this  depreciation. 
The  recoinage  increased  the  evil,  for  it  exactly  prepared  the  coins  for  ex 
portation,  by  making  them  full  weight,  without  increasing  their  home  value 
as  a  legal  tender.  So  the  mischief  continued,  in  more  or  less  force,  through 
out  the  whole  of  the  18th  century.  The  effect  was  to  introduce  gold  into 
circulation  in  place  of  the  withdrawn  silver.  The  extreme  fluctuations  of 
the  gold  which  was  thus  drawn  so  largely  into  the  channels  of  trade,  pro 
duced  great  inconvenience,  and  kept  up  bitter  complaints.  So  inefficient 
were  the  means  employed  to  keep  the  silver  in  circulation,  all  but  the  worn 
and  light  coins  being  constantly  withdrawn  and  exported,  that  in  1797  the 


100  NOTES    TO    CHAPTER    II. 

further  coinage  of  silver  was  forbidden.  A  century  of  experience,  and  an 
immense  sum  wasted  in  coinage,  had  sufficed  to  show  that  they  could  not 
by  mere  coinage,  countervail  the  laws  of  trade  in  bullion.  The  sum  of  the 
matter  was,  that  they  over-valued  gold  in  England,  and  silver  in  France  ; 
and  that,  by  consequence,  France  could  not  keep  gold,  and  England  could 
not  keep  silver.  In  the  progress  of  the  18th  century,  the  scarcity  of  silver, 
with  the  influx  of  gold  and  its  variations — the  guinea  varying  in  price  from 
thirty  to  twenty-one  shillings  and  sixpence  —  completely  unsettled  the 
ancient  money  of  account,  and  formed  a  new  one  upon  gold:  that  is,  the 
plenty  of  gold  made  the  people  by  degrees  more  familiar  with  its  value  than 
with  the  value  of  silver;  and  thus  a  new  money  of  account  began  to  form 
upon  gold.  This  was  perceived  as  early  as  1774,  when  silver  was  declared 
no  longer  a  tender,  except  by  weight,  beyond  £25." 


CHAPTER    III. 

§  1.  Gold  and  silver  a  common  equivalent  or  medium  in  ilie  interchange  of 
commodities —  Circulation  by  weight  —  Not  constituted  money  by  coinage, 
which  only  facilitates  ^circulation  —  Diversity  of  mints,  and  confusion  of 
coins  —  Wear  and  waste —  Clipping,  filing,  siceaiing  and  counterfeiting. 

WE  have  been  thus  full  in  the  treatment  of  money  of  account, 
its  nature  and  functions,  that  the  distinction  between  it  and 
coins  or  bullion  might  not  for  a  moment  be  lost  sight  of  in  the 
subsequent  discussions  of  this  volume.  We  have  seen  that  the 
money  of  account  occupies  the  whole  ground  of  the  expression 
of  prices ;  the  whole  ground  of  books  of  account,  so  far  as  prices, 
amounts  or  sums  of  debt  or  credit  are  stated  in  them ;  the  whole 
ground  of  the  statement  of  sums  or  amounts  in  bonds,  notes  or 
bills  of  exchange,  checks,  and  other  securities ;  the  whole  ground 
of  financial  estimates,  statements  and  computations  ;  in  fine,  all 
that  relates  to  money,  where  actual  equivalents  are  not  employed, 
belongs  to  the  domain  of  money  of  account.  The  formation  of 
a  money  of  account,  which  invariably  occurs  among  all  trading 
people  above  the  condition  of  savages,  takes  away  at  once  from 
gold  or  silver,  whether  coined  or  weighed,  all  application  or  use 
as  a  measure  of  price,  or  medium  of  comparison.  Among 
savages,  the  precious  metals  are  no  doubt  directly  compared  with 
the  articles  for  which  they  are  bartered  :  with  them  it  is,  lite 
rally,  so  much  of  one  thing  for  so  much  of  another.  It  is  not 
so  in  civilized  life,  where  commodities  are  very  seldom  sold 
with  any  thought  of  payment  being  exacted  in  gold  or  silver. 
The  money  of  account  not  only  serves,  to  this  extent,  the  use  of 
coins  or  bullion,  but  it  saves  even  any  actual  reference  to  them; 
it  is,  therefore,  an  immense  economy  in  trade.  It  narrows  the 
use  of  the  precious  metals,  perhaps,  more  than  any  other  agency. 

(101) 


102  GOLD    AND    SILVER. 

It  makes  the  credit  system  possible.  This  diminished  use  of  the 
precious  metals  indicates  vast  progress  in  industry  and  trade. 
In  the  forming  stages  of  society,  it  may  be  necessary  to  employ 
the  precious  metals  in  almost  every  transaction.  As  commerce 
is  now  carried  on  in  Great  Britain,  and  in  the  United  States, 
the  use  of  coins  or  bullion  does  not  extend  to  the  thousandth 
part  in  value  of  the  business ;  but  though  the  proportion  in  which 
they  are  used  is  so  reduced,  they  are  none  the  less  prized,  and 
still  remain  that  common  equivalent  with  which  every  other  com 
modity  can  be  purchased.  Although  very  little  employed  in 
large  purchases,  because  they  can  be  dispensed  with,  they  are 
the  only  articles  which  every  one  is  at  all  times  willing  to  take. 
Their  chief  office  is  in  the  payment  of  balances  of  trade.  When 
two  nations,  or  two  provinces,  or  districts,  or  individuals,  trade 
with  each  other,  their  mutual  debts  may  be  set  ofi'  against  each 
other,  in  the  ordinary  course  of  business,  so  far  as  equal ;  but 
the  balance  either  way  is  payable  only  in  gold  or  silver,  because, 
where  other  articles  of  export  fail,  these  are  always  acceptable 
in  discharge  of  any  debt,  domestic  or  foreign. 

Small  as  is  the  proportion  of  the  precious  metals  to  the  whole 
value  of  commodities  exchanged,  yet  being  employed  in  the  retail 
dealing,  and  made  the  only  legal  tender  in  payment  of  debts, 
their  use  is  not  only  familiar  to  the  public,  but  creates  a  vague 
impression  that  all  dealings  and  prices  have  a  strict  reference 
to  coins,  or  specific  quantities  of  gold  or  silver.  We  have 
shown  that  this  is  an  erroneous  impression :  they  are  seldom 
referred  to  when  the  term  money  is  used.  Gold  and  silver  are 
only  referred  to  in  dealing,  when  the  actual  intention  of  the  par 
ties  is  to  deal  in  or  employ  them.  Coins  cannot  perform  the 
functions  which  are  the  attributes  of  a  money  of  account.  They 
are  not  used  for  the  statement  or  expression  of  values.  When 
used  in  a  purchase,  or  in  discharge  of  a  debt,  it  is  an  equivalent 
—  as  commodities  applied  to  that  purpose,  the  value  of  which  is 
as  necessary  to  be  stated  in  money  of  account  as  that  of  any 
other  article.  The  term  money  has  many  significations,  and  of 
course  two  that  are  very  different  —  when  applied  to  money  of 
account,  and  to  coins  of  gold  or  silver :  in  one  sense  it  is  used 


GOLD    AXD    SILVER.  103 

to  express  values,  and  to  state  amounts ;  and  in  the  other,  it  is 
applied  to  a  commodity  used  in  actual  purchase,  or  in  actual 
payments. 

It  is  in  the  latter  sense  that  we  are  now  to  speak  of  the  pre 
cious  metals ;  their  use  as  money  in  no  way  divests  them  of  their 
quality  of  a  commodity.  A  man  may  invest  his  fortune,  or  any 
portion  of  it,  in  land,  in  cotton,  in  silk,  in  gold  or  silver.  Pre 
ference  for  these  metals  as  a  common  equivalent  dates  from  the 
earliest  records  of  history,  and  probably  prevailed  long  before 
the  idea  of  money  was  formed.  It  would  be  interesting  to  assem 
ble  here  all  the  fragments  of  history  on  this  subject;  but  it 
would  not  much  subserve  our  purpose.  We  have  abundant 
proof,  in  early  history,  that  gold  and  silver  were  employed  as 
"money  of  the  merchant;"  that  they  were  weighed  and  passed 
as  current  money.  Although  called  money,  when  thus  weighed 
and  passed,  it  is  obvious  that  the  term  means  no  more  than 
that  gold  and  silver  were  the  commodities  used  to  barter  or 
exchange  for  all  other  things,  and  for  all  services.  This  gave 
them  the  name  and  office  of  money ;  and  in  this  sense  there  is 
neither  mystery  nor  difficulty  in  comprehending  the  nature  of 
money.  The  beauty,  admirable  qualities,  and  superior  conve 
nience  of  these  metals,  as  embracing  great  values  in  small  com 
pass,  have  in  all  ages  recommended  them  for  this  purpose.  They 
were  employed  three  thousand  years  ago  as  money ;  they  are 
still  so  employed.  Gold  and  silver,  in  the  days  of  the  Pharaohs, 
were  weighed  as  money ;  they  are  still  weighed  as  money  in 
China :  they  are  still  weighed  among  us,  and  in  Europe.  The 
fact  of  their  being  weighed  by  public  authority,  and  issued  in 
pieces  of  convenient  size,  in  no  way  alters  the  nature  of  their 
function  of  money,  though  it  doubtless  adds  vastly  to  their  con 
venience,  and  quickens  their  circulation.  Such  pieces  of  money 
are  not  received,  in  payments  and  purchases,  in  virtue  of  their 
accurate  weight,  and  their  bearing  the  impress  of  public  autho 
rity,  but  because  they  are  gold  or  silver,  certified  as  to  quality 
and  quantity  by  the  impression  of  the  coinage. 

Much  of  the  difficulty  of  understanding  the  distinction  be 
tween  money  of  account,  and  money  the  medium  of  exchange,  is 


104  GOLD    AND    SILVER. 

removed  where  the  medium  or  money  is  weighed.  Every  one, 
then,  knows  that  he  expresses  the  price  of  gold  or  silver  by 
weight,  as  he  expresses  the  price  of  other  things.  There  is  no 
complication  in  the  transaction.  The  articles  thus  exchanged 
are  examined  as  to  quantity  and  quality,  the  respective  values 
computed,  and  the  exchange  is  made  by  the  arithmetic  of  the 
money  of  account.  It  is  simply  the  use  of  gold  or  silver  as  arti 
cles  for  which  all  other  things  are  freely  exchanged ;  and  this 
use  is  supported  both  by  the  market  value  of  the  metals,  and  by 
the  convenience  and  confidence  aiforded  by  coinage.  It  is  pro 
bable  that  the  exchangeable  value  of  gold  and  silver  is  enhanced 
by  their  being  employed  as  a  common  medium  of  exchange, 
thereby  increasing  the  demand  for  them  in  proportion  to  the 
amount  so  used.  The  use  made  of  them  as  a  medium  of  ex 
change  by  no  means  alters  their  price  or  value ;  it  is  only  one 
of  the  many  uses  to  which  they  are  applied.  It  is  obvious  that 
this  medium  of  exchange  is  an  expensive  instrument,  the  gold 
and  silver  employed  in  this  way  being  of  no  other  use.  The  great 
value  of  the  instrument  imposes  a  limit  upon  its  use,  and  pre 
vents  it  from  being  employed  as  much  as  would  otherwise  occur. 
This  limit  of  circulation  could  not  be  overcome  by  increasing  the 
quantity  employed  as  a  medium  of  exchange ;  because  increasing 
the  quantity  involved  an  increase  of  the  expense  of  interchange 
of  the  medium  employed,  or  a  depreciation  of  the  medium  em 
ployed.  In  no  country  does  the  quantity  of  the  precious  metals 
used  as  money  probably  exceed  one-tenth  of  the  value  of  the  gross 
annual  product  of  its  industry ;  and  in  none  does  it  probably  exceed 
one-hundredth  part  of  the  whole  transferable  property  of  the 
people.  To  employ  a  larger  quantity,  as  a  medium  of  exchange, 
has  not  been  found  advantageous.  To  avoid  increasing  this  quan 
tity,  and  even  to  save  the  necessity  of  employing  it  all,  an  im 
mense  number  of  devices  have  been  resorted  to,  with  more  or  less 
success,  the  consideration  of  which  will  be  reached  as  we  proceed. 
The  first  important  step,  after  weighing  the  precious  metals 
in  payment,  was  coinage,  a  facility  which  greatly  promoted  a 
rapid  circulation  of  money.  In  the  shape  of  coins,  a  given  quan 
tity  of  money  could  be  employed  to  make  ten  payments  in  the 


GOLD    AND     SILVER.  105 

time  it  would  before  effect  one.  Coins  are  not  only  accurately 
weighed,  but  their  quality  is  also  accurately  tested ;  the  impres 
sion  on  the  piece,  which  makes  it  a  coin,  is  an  official  and  legal 
certificate  of  weight  and  quality.  The  gold  or  silver,  then,  which, 
previous  to  coinage,  had  to  be  carefully  cut  or  subdivided  and 
weighed,  and  carried  to  a  skilful  person  to  ascertain  its  purity, 
passes  as  a  coin  instantly  from  hand  to  hand,  without  delay  or 
hesitation.  Rapid  as  the  circulation  to  which  this  facility  of 
coinage  has  given  rise,  the  exigencies  of  industry,  civilization  and 
commerce  soon  exceeded  its  powers.  The  movement  of  the  pro 
ducts  of  industry  in  every  civilized  community  has  long  since 
far  surpassed  any  possible  circulation  of  coins.  This,  of  course, 
stimulates  efforts  to  effect  the  exchange  of  goods  without  the  in 
tervention  of  money.  Besides,  the  system  of  coinage  was  found  to 
be  susceptible  of  such  abuses,  as  tended  greatly  to  limit  its  use 
fulness  and  power.  Every  country  had  its  own  mint,  and  esta 
blished  its  own  regulations.  The  weights  of  different  countries 
did  not  correspond ;  and  as  the  coins  of  each  were  adjusted  by 
its  weights,  it  became  necessary  both  to  weigh  and  assay  coins 
circulating  out  of  their  own  territory.  The  people  of  each 
country  were  familiar  only  with  the  values  denoted  by  their 
own  coins,  and  therefore  could  not  know  the  standard  of  weight 
or  purity  adopted  at  other  mints  than  their  own  ;  they  could  not 
confide  in  the  certificate  impressed  upon  a  foreign  coin,  because 
they  could  not  understand  it.  This  difficulty,  which  has  greatly 
obstructed  the  use  of  coins  in  all  parts  of  the  world,  is  also 
greatly  enhanced  by  changes  in  weight  and  standard  of  quality 
at  all  the  mints,  and  by  changes  in  the  impressions  or  appear 
ance  of  coins.  When  more  than  a  hundred  different  mints 
were  issuing  new  coins  to  mingle  with  the  old,  a  confusion 
supervened  which  reduced  the  convenience  of  coinage,  in  some 
cases,  below  the  old  mode  of  weighing.  This  evil  became  so 
intolerable  as  to  beget  loud  and  bitter  complaints,  and  many 
attempts  at  reformation,  some  of  which  proved  only  aggravations 
of  the  mischief.  Many  were  the  suggestions  and  plans  for  a 
general  system  of  coinage  for  Europe.  It  may  well  be  doubted 
whether  the  vexations  and  losses  incurred  by  the  abuses  of 


106  GOLD    AND    SILVER. 

coinage  in  many  countries  did  not  far  exceed  all  the  disadvan 
tages  of  being  without  any.  There  are  now  in  the  vaults  of 
bankers,  in  Italy  and  Germany,  immense  sums  in  coins  which 
can  no  longer  be  circulated,  because  the  people  are  unwilling  to 
receive  them.  They  belong  to  a  past  generation,  their  weight 
and  quality  are  unknown  to  them,  and  of  course  their  price  is 
not  known.  These  pieces  are  only  used  in  bags,  in  the  heavy 
payments  between  bankers ;  they  have  ceased  to  be  applicable 
to  the  ordinary  circulation,  and  have  lost  part  of  their  powers 
and  usefulness.1 

1  Germany  alone  had  68  mints,  each  with  its  separate  coinage  and  regu 
lations.  "When  all  the  gold  and  silver  coins,  with  their  subdivisions,  from 
68  mints  were  circulating  over  a  territory  no  larger  than  Germany,  it  can 
readily  be  conceived  what  a  nuisance  this  variety  became  in  business.  But 
when  this  nuisance  was  enhanced  by  a  due  proportion  of  counterfeits,  by 
the  abrasion,  clipping,  and  other  deterioration  of  coins,  it  can  scarcely  be 
imagined  how  intolerable  the  burden  became.  The  complaint  was  loud 
and  bitter,  and  projects  for  reform  abounded  ;  a  system  to  be  uniform  not 
only  throughout  Germany,  but  Europe,  was  earnestly  demanded.  The  same 
evil  induced  the  establishment  of  banks  of  deposit  in  Holland. 

In  urging  upon  the  public  his  proposal  of  a  convention  of  delegates 
from  the  various  governments  of  Europe,  to  devise  a  uniform  mode  and 
system  of  coinage,  Scaruffi  placed  before  his  readers  the  whole  mischief  in, 
bold  relief.  The  director  of  the  mint  in  Reggio,  however,  could  not  move  the 
authorities  of  that  day  by  his  logic,  nor  by  his  position ;  and  he  lacked  the 
power  which  Napoleon  applied  to  the  subject  more  than  two  centuries  after, 
when  he  introduced  a  uniform  coinage  into  Italy.  No  sooner  had  the  power 
of  the  French  Emperor  ceased  to  be  felt  in  Italy,  however,  than  the  Pope, 
and  other  princes,  commenced  the  old  system  of  multifarious  coinage,  the 
evils  of  which  are  now  seriously  felt:  "  Dont  la  diversite  embarrasse  tons 
les  jours,  non-seulement  les  etrangers  et  les  voyageurs  mais  meme  les  ban- 
quiers  et  marchands  Italiens." 

Italy  is  said  to  be  famous  for  the  worst  coins,  and  the  best  writers  on 
money.  One  of  the  earliest  of  these  was  Scaruffi  ("Discorso  sopra  la  Mo- 
neta"),  published  in  1582,  and  to  be  found  in  the  second  volume  of  "Baron 
Custodies  Collection  of  the  Italian  Economists."  Scaruffi  was,  for  many 
years,  Master  of  the  mint  at  Reggio.  He  was  so  profoundly  impressed 
with  the  mischiefs  of  the  coinage,  that  he  looked  upon  it  not  only  as  the 
Bcourge  of  Italy,  but  as  "a  conflagration  which  threatened  all  Europe." 
Not  satisfied  with  deploring  these  evils  at  home,  and  with  suggesting  local 
remedies,  he  proposed  a  plan  for  a  uniform  and  general  coinage  for  all 


GOLD    AND    SILVER.  107 

The  complications  and  perplexities  of  coinage  have  long  been 
a  serious  grievance  to  the  industry  of  the  civilized  world  —  a 
grievance,  in  many  localities,  regarded  as  intolerable,  and  only 

Europe,  the  coins  to  be  the  same  in  size,  weight,  and  alloy  or  standard.  If 
this  suggestion  of  Scaruffi's  was  not  adopted,  another  important  one  was. 
He  proposed  that  all  manufacturers  of  plate  and  jewelry  should  bo  com 
pelled,  by  law,  to  place  their  mark  on  every  article  manufactured  by  them, 
together  with  a  designation  of  the  quality  of  the  metal.  This  is  now  the 
law  in  most  of  the  countries  of  Europe,  and  should  be  here. 

In  this  age  of  paper  currency,  of  higher  commercial  credit,  when  public 
opinion  is  strong  enough  to  restrain  men  in  authority  from  debasing  coin, 
it  is  scarcely  possible  to  credit  the  injury  inflicted  upon  industry  and  com 
merce  by  the  diverse  coinage  of  Italy,  its  alterations,  counterfeits  and  de 
basements.  This  combined  evil  is  not  only  called,  as  above,  a  conflagration, 
but  a  scourge,  a  pestilence;  it  was  compared  with  the  contemporaneous 
famine  and  pestilence  of  the  IGth  and  17th  centuries.  The  aid  of  Heaven 
and  the  Church  was  invoked  by  processions,  indulgences,  &c.,  to  miti 
gate  the  morbus  mimericus.  The  ecclesiastical  remedy  was  not  suc 
cessful. 

"L'ltalie  fut  sans  contredit  la  nation  qui  souffrit  le  plus  de  cet  excess  si 
grave.     Divisee  pour  son  malheur  en  taut  d'etats  divers,  le  mal  semblait 
multiplier  par  le  nombre  de  ces  gouvernmens."     ;  ....  ....     "Us  persisterant 

alors  dans  la  stupide  determination  de  laisser  1'Italie  ce  qu'elle  6tait  depuis 
long-temps,  une  MOSAIQUE  de  gouvernemens,  de  lois,  de  douaines,  de  mou- 
iiaies,"  &c. 

In  the  Papal  dominions  a  custom  has  prevailed,  which  adds  greatly  to  the 
perplexities  of  those  who  have  to  deal  in  the  coins  of  Italy.  Every  Pope 
adopts  new  devices,  and  often  makes  other  changes,  for  the  coins  to  be 
issued  during  his  Pontificate ;  and  besides  this,  the  interregnum  between 
the  demise  of  one  Pope  and  the  election  of  another,  which  is  often  a  period 
of  some  months,  is  characterized  by  a  coinage  of  its  own.  Between  the 
years  1700  and  1780,  there  were  issued  from  the  mints  at  Home  283  dif 
ferent  coins,  of  which  67  were  gold.  Besides  these,  other  varieties  were 
issued  from  other  mints  in  the  ecclesiastical  States,  as  Boulogne,  Ferrara, 
and  Gubbio.  [  "Caissier  Italien,"  folio  8.] 

In  the  same  period,  the  other  mints  of  Italy  were  active,  and  issued,  in 
cluding  those  of  the  ecclesiastical  estates,  not  less  than  800  varieties  of 
coin,  to  circulate  in  the  small  territory  of  Italy. 

It  was  felt  to  be  a  great  relief  from  this  intolerable  confusion,  when  Napo 
leon  introduced  a  uniform  coinage.  This  blessing  was  only  enjoyed  during 
the  ascendency  of  the  French  Emperor.  As  soon  as  it  ended,  in  1814, 
every  government  of  Italy  returned  to  the  old  system  of  coinage,  and  con 
tinues  it  until  the  present.  A  traveller  may,  at  any  time,  obtain  a  roleau 


108  GOLD    AND    SILVER. 

escaped  by  the  establishment  of  banks  of  deposit,  or  other  de 
vices.  We  refer  now  only  to  the  multiplicity  of  coins  of  different 
weights  and  degrees  of  purity.  Of  course  this  evil  was  immensely 
increased  by  the  secret  debasement  of  coins  practised  in  a 
greater  or  less  degree  at  all  mints,  until  within  a  very  brief 
period. 

But  coinage  was  found  to  have  its  difficulties,  independent 
of  mere  complication  and  variety  of  coins  and  standards.  The 
coins  .in  actual  use  were  found  to  lose  in  weight  by  wear  so 
rapidly,  that  the  smaller  sizes,  in  the  course  of  a  few  years,  dete 
riorated  in  weight  from  ten  to  twenty  per  cent.  This  inevitable 
process  was  slow,  but  sure;  the  coins  of  a  whole  people  became 
so  diminished  and  injured  in  their  own  hands,  that  men  of  busi 
ness  were  afraid  to  receive  them  at  their  nominal  value.  This 
deterioration  of  course  obstructed  their  circulation,  and  lessened 
their  power  and  usefulness.  Every  European  country  has  suf 
fered  seriously  from  this  cause. 

Another  difficulty  encountered  by  coinage,  scarcely  less  than 
any  other,  is  the  facility  it  gives  to  counterfeiting,  and  to  frauds 
upon  the  genuine  coin.  Coined  money  circulates  with  such 
rapidity,  upon  the  faith  of  the  public  certificate  on  its  face,  veri 
fying  weight  and  quality,  that  counterfeit  coins  are  put  in  circu 
lation  among  the  people  with  a  success,  which  makes  it  a  large 
business  wherever  coins  are  extensively  employed ;  and  counter 
feit  coins  often  continue  long  to  exercise  the  functions  of  money, 

of  coins  from  an  Italian  banker,  which,  though  of  full  weight,  can  only 
"be  disposed  of  at  a  discount.  We  said,  may  obtain  ;  we  should  rather 
have  said,  he  will  be  fortunate  if  he  is  not  sometimes  served  in  that 
way. 

Those  who  wish  to  know  more  of  the  evils  of  Italian  coinage  and  money, 
may  consult  the  Cambist  writers,  Commercial  Dictionaries,  and  numis 
matic  authors  who  treat  of  the  coins  of  that  country.  See  Scaruffi,  Davan- 
zati,  and  other  writers,  whose  works  are  contained  in  the  collection  of 
Baron  Custodi,  of  the  "Economisti  Jtaliani,"  in  51  vols.  8vo.  See,  also, 
"  Raccolta  degli  Scrittori  delle  Moneta  d' Italia,  Fillipo  Arc/dlati ;"  "  Sloria 
della  Economia  Pulblica  in  Italia,  di  Conte  Pecckio ;"  "Histoire  de  la  Re- 
pullique  de  Venise,"  torn.  iii.  75;  "Caissier  Italien,"  passim;  "Marperger 
on  Banks,"  1717,  4to,  pages  170  to  180,  in  German. 


GOLD    AND    SILVER.  109 

before  they  are  discovered.  In  China,  the  skill  of  counterfeiters 
is  such,  as  wholly  to  prevent  the  use  of  coins ;  and  that  vast 
population  is — for  that  reason,  it  is  said  —  confined  to  the 
primitive  mode  of  weighing,  in  payments,  all  the  gold  and  silver 
used  in  commerce. 

Genuine  coins  are,  by  fraud,  subjected  to  processes  which. 
rob  them  of  a  considerable  proportion  of  their  value.  They  are 
punched ;  sweated ;  filed ;  sawed  in  two,  the  interior  scooped  out, 
and  filled  with  lead,  the  sides  being  then  reunited ;  these,  and 
other  modes  of  making  a  profit  on  new  coins,  have  been  success 
fully  practised  in  every  country,  to  a  greater  or  less  extent.  By 
these  processes,  coins  are  reduced  at  once,  for  the  profit  of  the 
operator,  to  the  lowest  value  at  which  they  will  circulate.  They 
may  thus  lose,  in  a  day,  as  much  as  they  would  have  lost  in 
years  of  circulation.  If  these,  and  other  mischiefs  attendant 
upon  a  large  circulation  of  coins,  are  not  felt  to  the  extent  they 
once  were,  it  is  because  the  circulation  of  coins  is  so  largely 
replaced  by  bank-notes,  that  false  coiners,  finding  it  unpro 
fitable  to  pursue  the  business,  have  turned  their  attention, 
with  great  success,  to  the  production  of  counterfeit  bank-notes. 
Whenever  governments  return  to  a  large  circulation  of  coins, 
false  coiners  will  be  found  at  their  old  business.1 

We  find,  then,  in  practice,  various  limitations  to  the  power 
of  the  precious  metals  as  money.  They  must,  in  the  first 
instance,  be  weighed  and  assayed  before  they  are  received  in 
payment.  If  that  difficulty  be  removed  by  public  authority, 
and  pieces  be  issued  ready  weighed,  of  a  certain  quality  or 
.standard,  then  the  changes  of  weights  and  standard,  the  multi 
plicity  of  coins  consequent  upon  the  great  number  of  mints,  the 
counterfeits  and  frauds  upon  the  coins,  all  together  make  up  a 

1  When,  upon  an  occasion  not  very  remote,  one  of  the  governments  of 
Italy  recalled  a  coin  only  a  few  years  in  circulation,  the  officers  of  the  mint, 
not  being  a\vare  of  the  danger,  found  after  a  short  time  that  they  had 
already  redeemed  a  much  larger  amount  of  the  specific  coin  than  the  mint 
had  issued,  and  the  offerings  for  redemption  were  far  from  growing  less. 
If  this  test  were  applied  to  many  coins,  it  would  reveal  a  quantity  of  base 
money  of  which  few  have  any  suspicion. 


110  GOLD    AND    SILVER. 

great  obstruction  to  the  continued  and  increased  use  of  gold  and 
silver  as  a  sole  medium  of  exchange.  We  shall  recur  again  to 
the  fact,  that  the  great  value  of  these  metals  makes  their  use  a 
very  expensive  method  of  effecting  exchanges. 

These  difficulties  in  the  use  of  the  precious  metals  as  an  in 
strument  of  payment,  have  operated  with  such  effect  in  the  more 
civilized  portions  of  the  world,  that  only  a  very  small  portion 
of  the  exchanges  of  the  products  of  industry  are  now  effected  by 
the  actual  intervention  or  presence  of  either  gold  or  silver.  They 
are  now  chiefly  used  in  retail  dealing,  in  small  transactions, 
and  in  paying  balances  of  trade.  The  great  subdivision  of 
which  the  precious  metals  are  susceptible,  specially  fits  them 
for  the  actual  payments  of  the  retail  trade.  Where  countries, 
districts,  or  individuals  have  large  and  continued  dealings,  by 
which  they  in  effect  exchange  goods  for  goods,  a  balance  may 
fall  either  way,  for  which  the  goods  are  not  wanted ;  such 
balances  are  with  facility  discharged  by  the  export  of  gold  or 
silver.  But  there  is  still  a  natural  tendency  in  the  marts  of 
commerce  to  avoid,  in  every  possible  way,  the  use  of  so  expen 
sive  an  instrument  of  trade  as  gold  and  silver.  The  various 
modes  of  dispensing  with  them,  and  the  substitutes  employed, 
will  come  under  our  notice  hereafter. 

|  2.  Circulation  of  the  precious  metals  as  money  —  Commerce  depends  upon 
coins  for  so  much  use  as  is  made  of  them,  and  no  moi^e — Tliey  perform  no 
functions  beyond  the  use  we  see  made  of  them. 

No  term  is  more  common,  in  treating  of  money,  than  circula 
tion.  It  is  applied  equally  to  all  its  substitutes,  as  bank-notes, 
checks,  bills  of  exchange,  and  promissory  notes,  and  other  secu 
rities.  It  is  a  term  founded  on  well-known  facts,  and  descrip 
tive  of  well-known  tendencies.  With  the  facts  and  many  of  the 
details  of  circulation,  all  men  of  business  are  more  or  less  fami 
liar  ;  but  not  many  give  themselves  the  trouble  to  analyze  the 
process,  and  its  results.  They  know  that  money  goes  and  comes  ; 
that  it  passes  round,  and  appears  to  return  whence  it  set  out ; 
and  that  there  is  a  sort  of  average  quantity  of  money  circulating 
among  a  certain  number  of  people  in  a  certain  district :  that  if 


GOLD    AND     SILVER.  Ill 

the  very  same  coins  do  not,  year  after  year,  perform  the  same 
round,  a  very  considerable  proportion  will  be  found  in  the  same 
track.  Few  examine  minutely  the  details  which  give  this  circu 
lar  impulse  to  money,  as  it  moves  in  the  channels  of  business. 

Money  being  a  medium  by  which  men  exchange  commodities, 
its  movements  are  wholly  controlled  by  the  course  of  this  ex 
change  of  commodities.  Men  exchange  the  products  of  their 
industry,  or  their  professional  or  intellectual  services,  or  their 
bodily  labor  or  skill,  for  other  products,  or  for  other  services,  or 
labor  or  skill.  This  is  the  object,  sum  or  result  of  their  transac 
tions  ;  but  the  business  is  effected  by  exchanging  these  things, 
first  for  money,  and  then  by  exchanging  the  money  for  the 
things  required.  The  money  intervenes,  and  then  retires  ;  it  is 
not  of  the  substance  of  the  transaction.  If  the  exchange  desired 
could,  with  equal  convenience,  be  effected  without  the  aid  of 
money,  it  would  not  be  employed.  No  exchange  of  commodities 
is,  in  the  result,  any  the  more  effective  for  having  been  made 
with  money.  The  farmer  who  sells  a  quantity  of  wheat  for  §500, 
taking  a  parcel  of  land  in  payment,  and  who  afterwards  pur 
chases  agricultural  implements,  giving  the  land  in  payment,  has 
exchanged  his  wheat  for  the  implements  by  the  medium,  not  of 
coins,  but  of  land ;  but  the  exchange  is  equally  as  effectual  and 
advantageous  for  him,  as  if  made  with  coins.  The  medium  em 
ployed  leaves  none  of  its  marks  or  characteristics  on  the  exchange. 
It  may  be  a  very  grave  question,  in  many  localities,  whether 
wheat  can  be  more  advantageously  converted  into  flour  by  steam 
or  water-power ;  but  it  is  of  no  consequence  to  those  who  eat 
the  bread,  what  medium  has  been  employed  in  the  conversion. 
So,  whatever  importance  belongs  to  the  subject  of  money,  and 
other  modes  of  exchange,  it  in  no  way  affects  the  validity  or 
usefulness  of  the  exchange,  however  it  may  have  been  accom 
plished.  The  first  consideration  is  the  desired  exchange ;  the 
next  is,  that  it  should  be  effected  at  the  least  expense,  and  with 
the  greatest  facility  possible.  Of  course  so  expensive  an  article 
as  coined  money,  whatever  its  merits  as  a  medium  of  exchange, 
will  not  be  used  when  it  can  be  dispensed  with ;  and,  as  a  matter 
of  fact,  very  few  of  the  exchanges  referred  to  are  now  made  by 


112  GOLD    AND    SILVER. 

the  intervention  of  coins.  But  although  these  are  now  so  gene 
rally  dispensed  with,  yet  the  mode  and  causes  of  the  circulation 
of  money,  were  it  invariably  used,  requires  not  the  less  to  be 
better  understood. 

Every  man  exchanges  that  which  he  has  to  spare  for  that 
which  he  wants,  and  others  have  to  spare ;  and  there  is  scarcely 
a  community,  of  which  the  members  are  not  more  or  less  de 
pendent  on  each  other.  All  are,  to  some  extent,  dependent  on 
the  farmer,  merchant  and  mechanic ;  but  these  are  dependent 
on  the  physician,  lawyer,  teacher,  and  other  professional  men ; 
and  all  are,  by  a  complicated  but  well-understood  dependence, 
linked  together.  All  receive  something,  directly  or  indirectly, 
from  the  others.  Now,  if  money  were  used  in  all  this  inter 
change  of  commodities  and  services,  it  would  be  found  to  tra 
verse  the  whole  circle  of  the  community;  and  though  it  might 
pass  back  and  forwards  many  times  in  the  hands  of  individuals, 
yet  it  would  have  performed  a  round  in  the  community. 
The  chief  transactions  of  any  community  are  substantially 
the  same  every  year,  or  half  year ;  and  it  would  happen  that 
very  nearly  the  same  sum,  if  not  the  same  money,  would  pass 
through  the  same  hands  every  season.  Great  variations  must 
of  course  occur,  but  there  would  be  an  approximation  to  the 
same  results.  The  farmer,  the  mechanic,  tradesman,  manufac 
turer,  and  the  professional  man,  would  all  go  through  nearly  the 
same  round  of  exchanges,  and  be  ready,  with  the  return  of  the 
season,  to  go  through  them  again.  The  money  would  thus  have 
actually  been  paid  for  every  commodity,  and  for  every  service, 
only  as  a  medium.  The  substance  of  the  whole  would  be  the 
transactions  or  dealings  which  had  taken  place  between  the 
parties,  the  money  being  left  wholly  out  of  view.  The  rapidity 
of  the  circulation  determines  the  quantity  of  money  required ; 
and  the  rapidity  of  circulation  depends  on  the  state  of  industry, 
and  upon  the  roads,  rivers,  cities,  and  other  natural  and  artifi 
cial  facilities.  But  the  circulation  is  mainly  and  chiefly  facili 
tated  by  that  mutual  dependence  in  a  community  which  springs 
up  when  people  supply  their  own  wants.  The  narrower  the  circle 
in  which  money  moves,  other  things  being  equal,  the  more 


GOLD    AND     SILVER.  113 

exchanges  it  can  effect.  If  farmers,  manufacturers,  tradesmen, 
mechanics,  and  men  of  all  the  various  occupations  which  go  to 
make  up  a  civilized  community,  are  close  together,  their  ex 
changes,  if  effected  with  money,  will  be  rapid  in  proportion  to 
their  vicinity.  If  we  imagine  a  people  wholly  isolated,  then  the 
circulation  among  them  would  be  complete ;  no  part  of  their 
money  would  flow  into  other  channels,  and  no  final  balance 
would  remain  to  be  settled  with  any  other  community. 

The  regularity  of  this  movement,  and  the  sameness  of  the 
result,  has  suggested  to  many  minds,  in  every  age  of  the  world, 
that  money  does  not  perform  its  functions  by  reason  of  its  intrin 
sic  value,  but  by  virtue  of  this  circulation.  It  appeared  to  them 
that  if  parties  were  agreed,  any  other  substance  would  perform 
the  same  office  as  well.  The  Carthaginians,  history  informs  us, 
resorted  to  leather  as  a  material  for  money ;  and  the  Chinese, 
some  eight  centuries  ago,  to  paper,  not  on  any  principle  upon 
which  paper-money  is  now  used,  but  simply  as  a  material  for 
money,  on  which  could  be  impressed  a  certificate  of  value,  for 
which  each  piece  of  leather  or  paper  was  to  pass.  We  have  no 
adequate  account  of  the  experiment  in  leather ;  but  the  Chinese 
trial  of  paper  proved  as  unfortunate  as  some  of  the  same  kind 
in  later  times. 

It  is  obvious  enough,  upon  a  little  consideration,  that  much  of 
the  efficacy  of  money  depends  on  the  fact  that  it  circulates  in 
accordance  with  the  mutual  dependence  of  the  people,  and  with  a 
rapidity  proportioned  to  the  smallness  of  the  circle,  and  to  the 
natural  or  artificial  facilities  which  exist  to  aid  the  transporta 
tion  of  the  commodities  for  which  it  is  used  as  a  medium  of 
interchange.  But  the  regularity  of  the  proceeding  in  no  com 
munity  is  ever  so  great,  that  mere  counters  could  be  safely  sub 
stituted  for  money  of  intrinsic  value,  an  idea  which  has  haunted 
men  in  all  ages,  and  no  doubt  gave  rise  to  the  experiment  of 
the  Carthaginians  and  the  Chinese.  The  idea  is,  that  if  men 
agree  what  substance  they  will  use  for  money,  as  they  only 
receive  it  to  pay  it  away,  it  is  perfectly  indifferent  what  the 
material  is,  so  it  be  convenient.  There  are  insuperable  objec 
tions  to  a  mere  conventional  medium  of  exchange ;  among  these 
8 


114  GOLD    AND    SILVER. 

is  the  wide  door  it  opens  to  fraud,  and  the  difficulty  of  restrict 
ing  its  quantity,  which  is  the  only  means  of  maintaining  its 
nominal  value.  If  mere  counters,  without  value,  would  purchase 
articles  of  value,  counters  would  be  supplied  too  rapidly.  When 
the  medium  employed  has  an  intrinsic  value  corresponding  with 
its  nominal  price,  then  the  holders  are  at  all  times,  and  under 
all  circumstances,  safe  at  every  stage  of  commercial  progress. 
Let  war,  revolution,  commercial  revulsion,  or  despotic  authority 
bring  forth  what  evils  they  may,  the  people  have  in  their  hands 
either  their  commodities,  or  their  price  in  the  precious  metals. 
It  is  true  that  any  material  employed  as  money,  which  all  are 
willing  to  receive,  may  with  perfect  success  fulfil  all  the  func 
tions  of  money  for  a  time  ;  but  no  means  have  yet  been  found  to 
make  money,  without  intrinsic  value,  adequate  to  all  circum 
stances  and  emergencies.  Men  may,  for  a  while,  concur  in  such 
experiments,  and  all  may  go  smoothly  for  a  time ;  but  when 
large  balances,  foreign  or  domestic,  are  to  be  paid,  when  the 
season  of  alarm  and  trouble  arrives,  the  conventional  money, 
which  depends  on  the  confidence  of  an  entire  community,  is 
stripped  in  a  moment  of  all  its  power  and  usefulness.  Counter 
feit  money  may,  for  a  long  period  undetected,  perform  all  the 
functions  of  genuine  coins ;  but  the  moment  its  true  character 
becomes  known,  all  its  power  is  gone. 

Whilst,  therefore,  the  circulation  of  money  presents  some  fea 
tures  of  regularity  which  suggest  the  idea  that  counters  may  be 
substituted  for  coins,  there  are  accompanying  irregularities, 
unavoidable  obstacles,  emergencies,  accidents  and  hazards,  which 
make  it  impossible  permanently  to  substitute  mere  counters 
for  coins.  The  devices  now  employed  so  extensively  under  the 
credit  system  are  not  of  this  kind ;  they  are  securities,  express 
ing  that  a  certain  amount  is  to  be  paid  on  demand,  or  at  a  day 
fixed.  A  counter,  without  intrinsic  value,  is  neither  a  thing  of 
value,  nor  a  security,  nor  a  claim  upon  any  one.  Whenever  it 
is  refused,  there  is  an  end  of  it. 

We  have  already  noticed  the  obstacles  to  rapid  circulation, 
arising  from  the  wearing  of  coins,  from  frauds  upon  the  coinage 
by  punching,  sweating,  splitting,  and  debasing ;  but  more  espe- 


GOLD    AND    SILVER.  115 

cially  from  the  immense  variety  of  coins  proceeding  from  scores 
of  different  mints.  Whatever  facility  of  circulation  any  people 
may  have  by  the  nature  of  the  country,  or  whatever  artificial 
facilities  might  be  provided,  these  obstacles  seem  to  place  a  limit 
to  a  largely  increased  circulation  of  coins,  which  neither  power 
nor  ingenuity  can  overcome.  The  first  remedy  resorted  to 
against  this  evil  was  only  an  alleviation.  The  collection  of  this 
multifarious  coinage  in  sacks,  duly  counted,  indorsed,  and  sealed 
with  the  name  of  some  well-known  merchant  or  banker,  only 
made  the  sack  circulate  as  so  much  bullion.  The  coins  were  no 
longer  useful  or  convenient,  and  their  circulation  as  such  was,  in 
fact,  at  an  end. 

The  next  great  remedy  for  these  obstacles  to  circulation  was 
the  establishment  of  such  banks  as  those  of  Amsterdam  and 
Hamburg.  These  banks  received  coins  on  deposit,  after  care 
fully  ascertaining  their  value,  and  placed  the  amount  received 
to  credit  of  the  depositor.  The  holder  of  such  a  deposit 
transferred  his  title  to  the  money  in  the  bank,  instead  of  count 
ing  and  delivering  the  coins.  This  method  of  transfer  would 
have  admitted  of  a  circulation  more  rapid  than  any  attainable 
by  coins  at  large,  had  not  these  banks  surrounded  the  transfers 
with  restrictions  and  limitations,  which  greatly  reduced  their 
efficacy.  In  some  cases,  but  one  transfer  of  the  same  amount 
was  permitted  in  one  day.  It  is  quite  obvious  that  the  same 
sum  might  be  transferred,  under  very  safe  regulations,  every  five 
or  ten  minutes  during  the  day.  But  this  process  of  transferring 
the  title  to  money  is  a  very  different  thing  from  circulating 
money.  It  is,  in  fact,  a  stoppage  of  the  circulation  of  coins ; 
the  title  circulates  in  their  place.  The  parties  to  such  transfers 
do  not  know,  nor  do  they  attempt  to  ascertain,  that  the  equiva 
lent  in  coin  is  actually  in  the  bank.  These  deposit  banks  were 
half-way  stations  between  an  exclusively  hard-money  circulation 
and  the  credit  system.  The  parties  who  transferred  and  received 
credits  in  these  banks  confided  in  the  fact  that  the  money  trans 
ferred  was  there.  There  was  an  exercise  of  confidence  and 
mutual  faith,  without  which  the  bank  could  not  have  existed. 
We  shall  have  occasion  to  remark  that,  in  the  case  of  the  Bank 


116  GOLD    AND    SILVER. 

of  Amsterdam,  that  confidence,  and  the  unimpaired  usefulness 
of  the  bank,  continued  long  after  a  large  portion  of  the  money 
had  been  abstracted  by  the  authorities  of  the  city. 

Banks  of  deposit,  then,  rather  mark  the  limits  of  the  circula 
tion  of  coins,  than  constitute  its  climax.  They  belong  almost 
as  much  to  the  credit  system  as  to  the  money  system,  partaking 
of  the  characteristics  of  both.  Whilst  civilized  people  have 
always  shown  a  strong  partiality  for  the  precious  metals  as  a 
medium  of  exchange,  the  history  of  the  last  four  centuries  shows 
that  there  have  been  inducements  strong  enough  to  suggest  and 
introduce  other  modes  of  effecting  exchanges.  No  doubt  the 
expense  of  gold  and  silver  as  a  medium  of  exchange,  the 
annoying  difficulties  growing  out  of  a  multifarious  coinage  at 
every  mint,  the  multiplication  of  mints  and  coins,  the  debase 
ment  of  coins  by  governments,  and  their  fraudulent  deterio 
ration  by  rogues,  contributed  at  a  very  early  date  to  drive  mer 
chants  and  men  of  business  to  other  methods  of  payment,  and  to 
seek  another  medium  of  exchange.  But  these  inducements  to 
resort  to  other  modes  of  payment,  influential  as  they  must  have 
been,  were  by  no  means  the  chief  reasons  why,  at  the  present 
day,  so  small  a  portion  of  business  transactions  arc  effected  by 
the  actual  employment  of  the  precious  metals  as  money.  The 
partiality  for  this  money  is  scarcely  less  than  it  has  ever  been. 
The  great  fact  is,  that  the  increase  of  industry  and  production 
for  the  last  three  centuries,  the  division  of  labor,  and  the  conse 
quent  vast  increase  in  the  interchange  of  commodities,  has  far 
transcended  any  possible  circulation  of  coins  as  a  medium  of  pay 
ment  for  the  whole  of  these  transactions.  It  may  be  safely 
assumed  that  when  other  modes  of  effecting  these  exchanges 
were  adopted,  it  had  become,  if  not  a  necessity,  at  least  a  conve 
nience  and  an  economy  too  considerable  to  be  resisted.  It  may 
be  asserted,  too,  very  safely,  that  though  the  precious  metals 
intervene  to  such  a  small  extent,  in  proportion  to  the  whole  pay 
ments  of  commerce,  yet  they  are  acting  now  as  effectively  as 
ever  they  did :  that  the  transactions  of  commerce,  which  now 
take  place  without  the  intervention  of  gold  or  silver,  are  such  as 
could  not  take  place  if  dependent  for  their  progress  upon  actual 


GOLD    AND     SILVER.  117 

payments  in  the  precious  metals.  The  exchanges  of  domestic 
and  foreign  commerce,  which  take  place  without  the  actual  aid 
of  gold  or  silver,  are  essentially  the  measure  of  the  incapa 
city  of  coins  to  accomplish  the  commerce  of  the  present  day. 
Gold  and  silver  money  have  long  ceased  to  be  the  chief  agent 
in  effecting  the  exchanges  of  commodities.  Their  chief  employ 
ment  now  is  as  the  small  change  of  retail  business,  as  a  means 
of  paying  the  balances  of  foreign  trade,  and  as  a  security  for 
the  public  in  the  business  of  banking.  The  quantity  of  coins 
withdrawn  from  circulation  for  this  purpose  of  banking  is  vastly 
more  than  made  up  by  the  greater  quantity  of  bank-notes  issued, 
and  by  the  greater  rapidity  of  bank-note  circulation  over  that 
of  coins.  Yet  if  the  comparison  between  what  is  done  with  and 
without  the  use  of  coins  be  enlarged  by  adding  to  the  circula 
tion  of  coins  that  of  bank-notes  also,  it  will  be  found,  especially 
in  Great  Britain  and  the  United  States,  that  a  very  small  pro 
portion  of  the  whole  payments  of  these  countries  is  effected  in 
coins  and  bank-notes,  even  when  taken  together. 

We  are  speaking,  it  will  be  kept  in  mind,  of  the  actual  use  of 
coins ;  of  what  is  effected  by  the  actual  transfer  of  gold  or  silver 
as  money.  We  yield  nothing  to  the  mistaken  idea  that  coins  are 
in  some  way  employed  whenever  prices  are  expressed.  Believing 
that  the  whole  subject  of  expressing  prices,  naming  amounts, 
writing  down  the  results  of  sales  in  books  of  account,  and  all 
similar  matters,  belong  to  and  are  fully  explained  by  the  opera 
tion  of  money  of  account,  we  refer,  in  speaking  of  the  agency 
of  coins  as  a  medium  of  exchange,  always  to  the  actual  employ 
ment  of  the  precious  metals.  In  this  restricted  sense,  every  man 
can  for  himself  determine  to  what  a  narrow  channel  their  circu 
lation  is  now  confined,  compared  with  other  more  effective 
agencies. 

Whatever  indefinite  ideas  some  may  entertain  upon  the  sub 
ject,  the  real  use  of  coins  is  merely  that  in  which  we  see  them 
employed.  Though  every  man  may  exact  payment  in  coins  of  all 
that  is  due  to  him  ;  yet  this  is  almost  never  done.  When  not  so 
exacted,  the  payment  is  made  in  some  other  satisfactory  way. 
The  Treasury  of  the  United  States  exacts  payments  in  coins, 


118  GOLD    AND    SILVER. 

and  the  payments  are  so  made.  Business  is  done  with  coins 
only  when  they  are  present  in  the  transaction,  actually  paid  and 
received.  For  so  much  use  as  is  made  of  coins  is  business  in 
debted  to  them,  and  no  more. 

§  3.     The  quantity  of  money  required  for  the  business  of  a  country. 

Few  mystifications  have  been  more  profound  than  those  which 
have  pervaded  speculations  on  the  quantity  of  money  required 
for  the  business  of  a  country,  and  on  questions  as  to  the  results 
of  an  increase  or  diminution  of  money.  Such  inquiries  appear, 
at  first  view,  important ;  and  few  of  the  earlier  writers  upon 
money  have  neglected  a  subject  so  inviting  as  the  amount  of 
money  needed  to  make  a  country  prosperous.  To  men  not 
deeply  versed  in  the  details  of  commerce,  there  appeared  no 
insurmountable  difficulty  in  the  topic.  It  was  long  a  favorite 
notion,  that  the  wealth  of  a  nation  was  measured  mainly  by  its 
stock  of  the  precious  metals ;  and  legislation  exhausted  itself  in 
the  vain  attempt  to  prevent  their  exportation.  That  commerce 
which  brought  home  gold  or  silver  was  considered  a  national 
blessing ;  that  which  carried  it  off  a  misfortune.  This  opinion, 
which  belonged  to  the  mercantile  school  in  political  economy, 
lingers  yet  in  many  countries,  and  in  many  minds  in  all  coun 
tries.  The* doctrines  on  the  subject  of  the  quantity  of  money, 
to  which  this  opinion  when  it  prevailed  gave  rise,  however,  con 
tinue  to  be  inculcated  as  earnestly  as  before,  although  they  lost 
their  chief  support  when  it  was  admitted  to  be  contrary  to  sound 
policy  to  prohibit  the  exportation  of  coin  or  bullion. 

To  us  it  appears  that  the  subject  is  wholly  impracticable,  and 
that  no  safe  conclusions  can  ever  be  drawn  from  such  reasonings. 
The  actual  quantity  of  money  in  a  country  never  has  been,  and 
never  can  be  ascertained  with  sufficient  exactness  to  make  it  the 
ground  of  any  safe  deduction.  The  actual  sum  of  money  em 
ployed  by  any  country  in  its  trade,  for  any  period  of  time,  it  is 
still  more  impossible  to  ascertain.  And  the  quantity  actually 
needed  in  any  country  for  the  purposes  of  its  trade,  during  any 
certain  lapse  of  time,  is  still  more  indeterminate.  Of  two  coun 
tries,  the  annual  value  of  whose  commerce  is  the  same,  one  will 


GOLD    AXD    SILVER.  119 

require  for  that  commerce  a  much  larger  sum  than  the  other. 
This  may  depend  on  the  relative  extent  of  their  several  territo 
ries  ;  on  the  state  of  their  roads  and  rivers,  and  other  internal 
communications ;  on  the  articles  in  which  they  respectively  deal ; 
on  the  size  and  location  of  their  cities  and  towns ;  on  the  state 
of  their  morals  ;  on  the  nature  of  their  governments ;  but  more 
especially  on  the  degree  or  extent  to  which  the  credit  system, 
and  its  various  devices  to  save  the  use  of  money,  have  been 
adopted. 

So  it  is  obvious  that  in  the  same  country,  at  different  times, 
varying  quantities  of  money  will  be  required  to  transact  the 
same  amount  of  business :  this  may  depend  on  a  state  of  peace 
or  war,  on  times  of  tranquillity  or  public  disturbance,  on  actual 
or  apprehended  mischiefs  in  legislation,  and  on  the  state  of  mer 
cantile  confidence.  All  these  are  influences,  the  intensity  of 
which  can  neither  be  measured  nor  estimated.  No  man,  there 
fore,  can  say  what  sum  of  money  is  needed  in  any  country,  at 
all  times,  nor  at  any  time.  Whatever  conjectures  may,  even  by 
the  most  observing  and  the  best  informed,  be  indulged  on  this 
subject,  cannot  form  any  data  worthy  of  consideration.1 

If  positive  quantities  are  out  of  our  reach,  comparative  are 
only  less  so ;  it  cannot  be  doubted  that  there  is  sometimes  more, 
and  sometimes  less  money ;  and  business  men  often  experience 
fluctuations  of  this  kind,  which  make  this  but  too  plain.  There 
is  no  gauge,  however,  by  which  we  can  measure  or  estimate  the 
extremes  of  these  fluctuations,  or  mark  their  intermediate  pro 
gress.  Nor  is  the  public  voice  always  correct  in  this  matter ; 
for  very  often  money  is  said  to  be  scarce,  when  its  holders  are 
only  unwilling  to  circulate  it  freely ;  and  often  it  is  said  to  be 
plenty,  when  its  circulation  is  only  rapid,  or  when  credit  sup 
plies  its  place.  It  is  often  observed  that  the  deposits  in  the 
banks  are  largest  at  the  time  when  the  cry  of  scarcity  is  loudest, 
and  smallest  when  there  is  no  complaint.  So  that,  although 
there  can  be  no  doubt  that  fluctuations  do  occur,  yet  not  always 
at  the  time,  nor  in  a  way  to  correspond  with  public  opinion. 

1  See  C.  II.  Rau,  Sect.  266 ;  Storch,  vol.  iii,  note  12. 


120  GOLD    AND    SILVER. 

The  alarm  produced  by  fear  of  invasion,  by  rebellion,  by  a  com 
mercial  crisis,  by  large  failures,  and  by  many  events  which  dis 
turb  a  commercial  atmosphere,  often  has  the  effect  of  producing 
this  apparent  scarcity  of  money.  At  such  moments,  money  is 
deemed  the  most  desirable  possession ;  and  all  who  have  it 
pause  before  they  part  with  it,  and  retain  it  if  they  can.  It 
ceases  to  circulate  freely,  and  the  impression  becomes  complete 
that  money  is  scarce.  When  no  disturbing  cause  is  at  work, 
when  trade  is  brisk  and  confidence  high,  all  are  made  to  feel 
that  money  is  ahundant,  because  merchandise,  at  such  seasons, 
is  more  desirable  than  money.  At  such  times,  too,  the  devices 
for  saving  the  use  of  money  are  easily  kept  in  operation,  and 
are  more  effective ;  money  is  thus  made  more  abundant  for  some 
purposes,  by  sparing  it  in  others.  It  seems,  then,  to  be  as  diffi 
cult  to  ascertain  the  actual  increase  or  diminution  of  money 
which  produces  fluctuations,  as  it  is  to  find  the  actual  quantity 
used  or  required  in  any  country ;  and  in  neither  case  can  any 
approximation  to  the  truth  be  near  enough  to  form  the  basis  of 
sound  conclusions.  It  is  certainly  better  to  approach  this  sub 
ject  on  safer  grounds,  and  to  regard  it  from  a  point  of  view 
which  will  take  in  admitted  facts. 

If  fluctuations  in  amount  are  injurious,  causes  and  prevent 
ives  become  more  pressing  inquiries  than  the  actual  quantities 
added  or  withdrawn.  It  is  the  varying,  and  not  the  actual  quan 
tity  which  does  the  mischief.  We  have  not  yet,  however, 
arrived  upon  safe  ground.  Not  being  able  to  ascertain  the  sum 
of  money  which  goes  to  make  up  a  circulation,  nor  the  sums  of 
increase  nor  decrease  which  constitute  injurious  fluctuations, 
and  knowing  that  other  causes,  such  as  those  already  indicated, 
produce  the  same  effects  as  variations  in  quantity,  there  must 
often  be  danger  of  mistake  in  assigning  causes,  or  in  proposing 
remedies.  On  a  subject  involving  so  many  combinations  as  this, 
those  who  are  most  confident  should  be  the  most  distrusted.  In 
a  general  treatise,  no  useful  rules  can  be  given  for  such  investi 
gations  ;  the  inquirer  must  painfully  and  watchfully  observe  the 
facts,  and  on  these  rest  his  conclusions. 


GOLD     AND     SILVER.  121 

Whatever  progress  may  hereafter  be  made  in  the  statistics  of 
money,  great  uncertainty  must  still  cling  to  this  subject.  If  the 
amount  of  metallic  money  actually  existing  in  any  country  could 
be  ascertained  with  exactness,  yet  it  could  never  be  known  how 
much  was  hoarded,  nor  how  much  was  in  the  hands  of  those 
who  kept  it  for  months,  or  years,  wholly  unemployed.  So  in 
regard  to  paper  currency.  The  amount  issued  may  be  told ; 
but  how  much  is  in  constant  use,  no  one  can  tell. 

If  such  speculations  are  worth  pursuing,  we  leave  them  to 
those  who  find  in  them  an  importance  which  does  not  strike  us. 
Hitherto,  all  that  we  have  seen  on  the  subject  has  been  unsatis 
factory.  What  we  may  further  say,  in  reference  to  the  quan 
tity  of  money  in  circulation,  will  be  under  other  heads.  The 
effect  of  quantity  upon  prices  is  a  question  of  the  highest  im 
port,  and  must  be  fairly  encountered.  So,  also,  the  agency 
of  increased  issues  upon  the  value  of  the  currency,  upon  the 
exchanges  in  stimulating  over-action  in  trade.  All  these  are 
subjects  deserving  of  close  attention ;  but  they  involve  other 
facts  and  considerations  than  those  which  concern  the  actual 
quantity  of  money,  and  the  problems  which  they  present  can 
never  be  solved  by  weighing  gold  and  silver,  or  numbering 
bank-notes. 

The  quantity  of  coins  required  by  banks  to  meet  their  engage 
ments  is  a  special  inquiry,  and  will  come  within  the  range  of 
subsequent  chapters.  It  involves  special  considerations  wholly 
different  from  the  question,  what  amount  of  the  precious  metals, 
in  the  shape  of  coins,  it  is  necessary  or  expedient  to  have  for 
the  business  of  a  country.  The  banks  have  a  certain  specified 
duty  to  perform,  and  they  must  form  their  estimates  according 
to  the  nature  of  that  duty.  But  the  quantity  of  metallic  money 
needful  in  a  country  is  wholly  indefinite,  and  must  be  left  to  the 
results  of  the  spontaneous  action  of  the  people,  and  their  gov 
ernment.  No  such  approximation  is  possible,  as  that  which 
may  be  made  to  the  quantity  required  by  the  banks.  The  real 
subject  is  trade  and  business,  and  the  modes  of  carrying  it  on : 
the  quantity  of  money  required  for  this  purpose  in  a  year  is 


122  GOLD    AND    SILVER. 

one  of  that  class  of  questions  which,  though  asked  in  advance, 
must  wait  the  reply  which  time  reveals.  It  may  be  interest 
ing  to  know  how  many  warehouses,  how  many  clerks,  how  many 
ships,  and  how  many  carts  will  be  employed  during  the  pro 
gress  of  a  year  in  a  particular  country ;  but  the  information  is 
unattainable.  There  is,  besides,  such  a  wide  range  of  manage 
ment  and  economy  in  all  these  things,  that  exact  quantities  and 
numbers  become,  in  a  great  degree,  unimportant. 


CHAPTER    IV. 

§  1.  The  precious  metals  neither  a  measure  nor  a  standard  of  value  —  Tliey 
are  the  legal  standard  of  payment —  The  mint  Tias  a  standard  of  coinage 
—  Legal  tender  —  Objections  to  legal  price  of  gold  and  silver — Earl  of 
Liverpool — Instances  of  price  fixed  by  authority  in  Great  Britain — • 
Seignorage  on  coins  for  retail  business  —  Waste  and  folly  of  incessant 
recoinage  —  Legal  tender  at  market  price  the  proper  mile  in  large  trans 
actions. 

WE  have  seen  that  there  is  a  very  obvious  distinction  between 
price  and  payment ;  that  prices  are  named  much  more  frequently 
than  sales  take  place,  or  payments  are  made.  If  the  price  is 
not  satisfactory,  neither  sale  nor  payment  follow.  It  is  only 
when  a  transfer  of  property  occurs  that  payment  is  required,  and 
that  the  equivalent  employed  to  effect  that  purpose  is  produced. 
The  parties  understand  each  other  as  fully  when  the  price  is 
named,  as  when  the  payment  is  made.  Prices  are  named  upon 
assumed  quantities  of  the  article,  to  which  the  price  is  affixed ; 
this  specified  quantity  must  be  carried  in  the  mind,  as  well  as 
the  value  of  the  unit  of  the  money  of  account.  Actual  weight 
or  measurement  by  the  parties  ascertains  the  quantity  of  goods ; 
coinage  is  generally  the  mode  of  defining  the  quantity  of 
the  precious  metals  employed  in  payment.  Men  are  not  always 
aware  that  they  employ  the  money  of  account  in  stating  the 
value  of  their  own  national  coins.  When  a  sale  to  the  amount 
of  one  hundred  dollars  occurs,  and  payment  is  offered  in  British 
sovereigns,  their  value  is  stated  in  accordance  with  the  then  ruling 
price,  from  $4.80  to  §4.90,  and  the  quantity  paid  is  adjusted 
accordingly :  if  the  payment  be  made  in  eagles,  the  process  is 
the  same ;  the  quantity  of  gold  in  ten  eagles  is  readily  stated 
at  the  known  price,  ten  dollars  each ;  but  if  the  eagles  are  of 

(123) 


124  STANDARD    OF    VALUE. 

the  old  coinage,  they  may  be  rated  at  one  dollar  and  five  or  six 
cents. 

The  precious  metals  are,  in  no  proper  sense,  a  measure  of 
value ;  they  are  simply  a  convenient  equivalent,  being  of  very 
great  value  in  small  compass,  susceptible  of  being  brought  to 
uniform  quality,  and  of  being  subdivided  into  pieces  or  coins  of 
any  required  weight.  These  pieces  are  not  employed  as  measures ; 
they  are  never  produced  to  express  or  ascertain  a  price,  or  show 
what  a  purchaser  or  seller  would  give  or  take  for  any  article. 
If  this  were  necessary,  the  equivalent  in  coins  would  have  to  be 
laid  down  in  every  transaction,  that  the  party  to  whom  an  arti 
cle  of  merchandise  was  offered  might  know  its  price.  When  a 
horse  is  said  to  be  worth  an  hundred  dollars,  the  price  is  better 
understood  than  if  one  hundred  dollars  in  silver  or  gold  coins 
had  been  exhibited  as  the  measure  of  the  value.  Neither  does 
expressing  prices  consist  in  naming  coins,  or  any  number  of 
them ;  for  this  facility  in  stating  prices  is  the  same,  whether,  or 
not,  there  exist  any  corresponding  coins  —  as  was  exhibited  in 
the  case  of  our  colonial  pounds,  shillings  and  pence. 

The  same  considerations  prove  that  the  precious  metals  are 
not,  strictly  speaking,  employed  as  a  sign  or  representative  of 
value.  They  are  neither  signs  nor  representatives,  in  any  prac 
tical  sense  of  these  words.  Such  expressions  have  all  sprung 
from  the  want  of  attention  to  the  functions  of  a  money  of 
account.1 

1  The  Earl  of  Liverpool,  in  his  elaborate  "  Treatise  on  the  Coins  of  the 
Realm,"  thus  sums  up  the  imperfections  of  coin  as  a  measure  of  value :  — 

"  1  Coins  are  an  imperfect  measure,  because  they  fluctuate  in  value  even 
when  made  of  one  metal  only.  Neither  gold  nor  silver  will  now  purchase 
as  much  of  any  article  as  before  the  discovery  of  America.  As  a  measure, 
neither  can  now  be  of  the  same  import  as  formerly. 

"  2.  If  coins  are  made  of  both  metals,  they  are  liable  to  vary  with  refer 
ence  to  each  other.  In  the  43d  of  Elizabeth,  fine  gold  was  to  tine  silver,  at 
the  English  mint,  as  11  to  1.  In  1G63,  it  was  14|^  to  1.  Guineas  were 
then  coined  as  20  shilling  pieces.  After  many  fluctuations,  and  rising  as 
high  as  30  shillings,  they  were  fixed  by  proclamation  at  21  shillings.  Fine 
gold  is  now  [1805]  as  15T3ay&  to  1. 

"  3.  If  the  sovereign  attempts  to  fix  the  rate  or  value  at  which  coins  of 


STANDARD     OF    PAYMENT.  125 

Another  attribute  frequently  given  to  the  precious  metals  is, 
that  they  are  a  standard  of  value.  This  is  equally  inaccu 
rate.  There  may  be  a  common  equivalent  —  an  article  that  is 
commonly  given  in  exchange  for  other  articles  ;  but  there  can 
be  no  standard  of  the  value  of  all  articles  of  merchandise. 
Every  commodity  may  have  its  standard  of  quality — a  certain 
grade  being  assumed,  with  which  all  other  specimens  are  to  be 
compared ;  but  no  one  article  can  be  assumed  or  regarded  as  a 
standard  for  other  things  of  a  totally  different  kind.  Gold 
cannot,  in  the  mint,  be  made  the  standard  for  silver ;  nor  can 
silver  be  made  the  standard  for  gold.  Much  less,  taking  the 
whole  range  of  articles  of  human  consumption,  can  there  be  any 
standard  of  value  or  price  to  which  all  can  be  referred,  or  with 
which  all  can  be  compared.  The  term  standard  is,  then,  inac 
curately  applied,  when  it  is  used  with  any  such  signification.  It 
is  said,  for  instance,  that  the  standard  of  Great  Britain  is  gold ; 
and  that,  until  recently,  that  of  France  and  the  United  States  was 
the  double  standard  of  gold  and  silver.  Standard  of  what  ?  There 
can  be  no  such  thing  as  a  general  standard  of  value.  The  term 
standard,  thus  used,  is  a  common  but  ill-chosen  expression  of  the 
fact,  that  in  Great  Britain  gold  is  the  standard  of  payment,  and 
that  in  France  and  the  United  States  both  gold  and  silver  were 
the  standards  of  payment;  or,  to  adopt  legal  language,  gold  in 
Great  Britain,  and  gold  and  silver  in  France  and  the  United 
States,  were  a  legal  tender  in  payment  of  debts.  If  the  term 
standard  is  employed  at  all,  it  should  be  standard  of  payment. 

That  there  should  be  some  legal  mode  of  discharging  a  debt 
is  the  settled  policy  of  modern  times.  In  some  countries,  gold 
is  made  a  legal  tender,  in  some  silver,  and  in  some  both  these 

different  metals  shall  pass,  a  third  imperfection  is  perceived.  Their  prices 
in  the  market  will  frequently  differ  from  the  rate  at  which  he  has  valued 
them  in  coins  ;  and  when  coins  of  two  metals  are  made  a  legal  tender, 
there  will  be  two  measures  of  property,  occasionally  differing  from  each 
other.  The  speculator  will  profit  by  this,  and  the  debtors  will  pay  debts  in 
the  cheapest  medium. 

"  A  fourth  imperfection  is  that  which  arises  from  gradual  wear,  which 
will  lead  to  the  melting  of  heavy  coins,  and  keeping  the  light  only  in  circu 
lation."  —  "Coins  of  the  Realm,"  pp.  10,  11,  12. 


126  STANDARD     OF    PAYMENT. 

metals,  in  discharge  of  debts.  So  "willing,  however,  are  people 
to  receive  payment  of  what  is  due  to  them  in  the  ordinary  cur 
rency,  whatever  it  may  be,  that  it  is  very  rare  to  see  a  formal 
tender  of  gold  or  silver,  or  to  hear  of  such  a  demand.  Their 
use  among  the  banks,  and  in  payment  of  foreign  balances,  does 
not  proceed  from  its  being  a  legal  tender,  but  from  pure* com 
mercial  reasons,  which  would  be  equally  operative,  if  the  law  of 
legal  tender  did  not  exist.  Gold  or  silver  would  seldom  be 
refused  in  discharge  of  a  debt,  even  if  no  law  required  it. 
Few,  however,  will  dispute  that  it  is  expedient  to  provide  some 
legal  mode  of  paying  a  debt,  that  every  man  may  be  able,  in 
some  way,  to  obtain  a  legal  acquittance  of  his  pecuniary  obliga 
tions,  or  at  least  be  discharged  from  liability  for  subsequent 
interest,  if  the  creditor  refuses  to  accept  the  legal  medium  of 
payment.  It  is  in  this  sense  that  the  word  standard  may  be 
applied  to  gold  and  silver,  apart  from  their  quality,  with  some 
degree  of  propriety. 

Though  it  is  the  policy  of  modern  nations  to  establish  a 
standard  of  payment,  and  though  gold  or  silver  are  the  best 
substances  for  that  purpose,  not  only  by  reason  of  their  intrinsic 
value,  but  on  account  of  their  being  so  generally  and  so  long 
used  as  money,  there  are  objections  is  fixing  the  price  by  law  at 
which  gold  or  silver,  or  both,  shall  be  received  in  payment  of  a 
debt.  This  has  been  done  in  the  face  of  the  admitted  fact  that 
both  the  precious  metals  fluctuate  in  value.  Nothing  has  con 
tributed  more  to  obscure  the  subject  of  money  than  this  fixing 
by  law  the  price  of  gold  and  silver. 

No  one  has  placed  the  argument  in  favor  of  the  government 
fixing  the  price  of  the  precious  metals,  in  a  more  distinct  and 
forcible  form,  than  the  Earl  of  Liverpool.  He  quotes  Mr.  Harris 
as  differing  on  the  point  from  Mr.  Locke  :  —  "'He  [Mr.  Harris] 
thought  that  the  regulation  of  the  value  of  coins  —  that  is,  the 
nominal  value  at  which  they  were  to  be  legal  tender — was  a  sub 
ject  of  too  much  importance  to  be  entrusted  at  any  time  to  pri 
vate  judgment;  and  it  is  certain  that  there  has  generally  been  a 
clause  in  the  mint  regulations  declaring  at  what  nominal  rate  or 
value  the  coins  directed  to  be  made  should  be  current.  It  is, 


FIXED     PRICE     OF    PRECIOUS    METALS.  127 

indeed,  hardly  possible  that  the  people  in  general,  particularly 
those  of  an  inferior  class,  should  be  able  to  exercise  any  true 
judgment  on  the  intrinsic  or  relative  value  of  the  metals  of 
which  any  coins  are  composed ;  and  if  they  were  to  attempt  to 
exercise  such  judgment,  they  would  be  exposed  to  perpetual 
frauds  and  impositions  from  money  jobbers,  and  others,  who 
understand  the  business  better  than  themselves.  The  practice 
of  all  governments,  in  every  age,  has  coincided  with  the  opinion 
of  Mr.  Harris ;  and  experience  has  evinced  the  necessity  of 
fixing,  by  public  authority,  the  rate  or  value  of  coins  of  every 
denomination  permitted  to  be  current  as  lawful  money  or  legal 
tender."  1 

This  is  a  distinct  assertion  of  what  many  deny,  that  the  price 
of  coins  under  the  prevailing  systems  of  coinage  is  fixed  by 
authority.  The  reason  of  this  practice  of  all  governments  is 
sound,  so  far  as  concerns  the  classes  the  Earl  of  Liverpool 
would  protect.  The  system  of  coinage  which  prevails  in  England 
for  silver,  is  a  protection  to  these  classes.  The  same  system  can 
be  applied,  with  proper  modifications,  to  gold,  and  the  protection 
would  be  equally  complete. 

The  objection  that  the  people,  in  general,  are  not  able  to 
exercise  any  true  judgment  as  to  the  value  of  the  metals,  is  of  no 
weight ;  because  there  is  always,  and  must  be,  a  market  price 
of  gold  and  silver,  which  does  not  and  cannot  depend  on  the 
judgment  of  people,  superior  or  inferior,  as  to  the  intrinsic  value 
of  these  metals.  It  is  a  price  determined  by  the  course  of  trade, 
and- the  course  of  procuring  the  precious  metals.  The  practice 
of  governments,  and  legislation  on  this  subject,  has  been  too 
exclusively  guided  by  consideration  of  the  merest  retail  trade, 
and  should,  therefore,  have  been  confined  to  that  business.  It 
is  in  the  power 'of  governments  to  fix  the  price  of  coins,  so  far 
as  they  can  be  employed  in  the  retail  business ;  but  beyond 
that,  no  public  regulation  is  needed ;  and  none  can  definitely 
fix  the  price  of  coins  or  bullion,  for  commerce  will  make  its 
own  price.  It  is  true  that  governments  can  enforce  a  law  of 

1  "  Coins  of  the  Realm,"  page  16. 


128        THE    PRICE    OF    THE    PRECIOUS    METALS, 

legal  tender,  even  against  the  course  of  commerce  and  the  laws 
of  trade,  as  to  the  payment  of  debts. 

This  is  what  is  attempted  by  the  prevailing  system,  which 
results  in  one  price  of  the  precious  metals  arising  from  the  trade 
of  particular  nations,  and  of  the  world ;  and  another  price  by 
public  authority,  according  to  which  debts  must  be  paid,  if  so 
demanded.  But  this  demand  is  almost  never  made,  and  so  far  the 
law  of  legal  tender  is  inoperative.  In  all  transactions  between 
the  people  of  different  nations,  the  commercial  price  of  bullion 
and  coins  is  alone  acknowledged.  As  the  people  of  no  class  are 
in  the  habit  of  demanding  payment  in  gold  or  silver  at  the  mint 
price,  it  would  not  disturb  them  in  the  least  if,  in  sums  over  $20, 
neither  coins  nor  bullion  were  a  tender  at  any  other  than  the 
current  commercial  price.  The  necessity,  then,  of  fixing  the 
price  of  coins  by  public  authority  is  not  acknowledged,  and  does 
not  exist  beyond  the  wants  of  the  merest  retail  trade.  Beyond 
that  it  is  operative  only  for  mischief,  and  is  practically  repu 
diated  by  foreign  merchants,  and  by  the  domestic  also,  so  far  as 
direct  dealing  in  bullion  is  concerned. 

It  is  evident  that  the  Earl  of  Liverpool  labored  under  the 
mistake,  that  prices  are  fixed  and  expressed  in  coins :  if  he  had 
not  been  wrong  in  this,  he  would  have  felt  less  afraid  to  leave 
coins,  in  large  sums  at  least,  to  the  market  rate. 

It  is  in  naming  the  rate  at  which  coins  shall  pass,  that  govern 
ments  place  a  fixed  price  upon  gold  and  silver.  It  is  done,  in 
the  case  of  domestic  coins,  by  prescribing  very  accurately  the 
weight  of  the  coin,  to  make  it  correspond  in  value  to  some  spe 
cial  amount  expressed  in  money  of  account.  In  the  case  of 
foreign  coins,  it  is  done  by  stating  the  price  directly  in  the 
money  of  account.  A  very  general  mistake  is  involved  in  this, 
which  may  be  mentioned  here,  although  it  does  not  concern  the 
present  question.  It  is  assumed  that  the  circulation  of  money, 
the  stating  of  prices,  and  the  reckoning  of  accounts,  will  be  faci 
litated  by  a  correspondence  between  the  coins  and  the  denomi 
nations  of  the  money  of  account.  This  is  only  true  in  the 
merest  retail  transactions.  In  large  payments,  it  has  operated 
unfavorably  to  the  interests  of  trade,  by  causing  the  coins  to 


AS    DENOTED     BY     BRITISH     COINAGE.  129 

circulate  at  their  nominal  rate,  after  they  began  to  be  seriously 
deteriorated  by  wear,  and  by  fraudulent  usages.  When  this 
takes  place,  as  has  frequently  been  the  case,  the  evil  is  one 
which  becomes  yearly  more  difficult  to  cure ;  and  serious  dis 
turbance,  both  of  the  money  of  account  and  of  the  coinage  itself, 
is  the  final  result,  with  great  national  and  individual  loss.  What 
is  needed,  in  large  payments  of  the  precious  metals,  is  not  a  cor 
respondence  with  the  money  of  account,  but  accurate  weights, 
and  the  proper  standard  of  quality.  If  gold  and  silver  were 
duly  assayed,  and  weighed  in  bars  of  convenient  size,  with  the 
proper  stamp  of  the  mint,  their  value  could  as  readily  be  stated  in 
money  of  account  as  if  it  were  in  coins,  and  it  could  be  paid  and 
received  much  more  readily.  Large  payments  in  gold  are  now 
made,  in  England,  by  weight ;  and  the  same  is  true,  to  a  con 
siderable  extent,  in  France  and  the  United  States. 

The  price  of  the  precious  metals  is  fixed,  by  law,  to  the 
minutest  possible  fraction.  The  public  authority  assumes  no 
arbitrary  weight  for  coins,  but  requires  them  to  correspond  in 
value  to  some  denomination  of  the  money  of  account.  It  orders 
that  a  certain  quantity  of  gold  or  silver  shall  pass  for,  or  be  a 
legal  tender  for  a  certain  amount.  When,  for  the  first  time,  an 
English  sovereign  was  coined  in  1816,  it  was  required  to  contain 
5dwts.  3f07g40-  grains  of  standard  gold,  or  4  dwts.  ITn1/^  grains 
of  pure  gold :  that  is,  that  quantity  of  gold  was  then  declared 
to  be  worth  a  pound  sterling.  That  regulation  continues,  with 
slight  change,  to  this  day ;  and  the  unit  of  the  English  money 
of  account  is  thus  unhappily  placed  at  the  hazard  of  every  fluc 
tuation  in  the  price  of  gold. 

As  the  sovereign  was  intended  to  be  the  actual  equivalent  to 
the  pound  sterling,  46T8293  sovereigns  were  to  be  coined  from  the 
pound  of  standard  gold.  By  this  method,  5  dwts.  3T207o4o  grains 
of  standard  gold  were  made  a  legal  tender  for  a  debt  of  one 
pound  sterling,  and  one  pound  of  gold  was  made  a  legal  tender 
for  <£46  148.  6d.  This  arrangement  was  made  in  pursuance  of 
an  act  of  Parliament,  and  could  only  be  changed  by  the  same 
authority :  until  such  authority  is  exerted,  the  same  quantity  of 
gold  could  be  legally  tendered  only  for  the  same  sum,  and  in 
9 


130  PRICE    OF    THE    PRECIOUS    METALS. 

greater  or  less  quantities  in  proportion  to  the  sum  to  be  paid. 
This  is  not  the  same  thing  as  to  assert  that  an  ounce  of  gold,  or 
a  pound  of  gold,  is  a  legal  tender  for  an  ounce  of  gold,  or  a 
pound  of  gold,  as  must  be  alleged  by  those  who  leave  wholly  out 
of  view  the  money  of  account.  There  has  been  no  time,  in  the 
last  five  centuries,  when  the  bankers  and  merchants  of  the  cities 
of  Europe  could  not  at  once  tell  the  value  of  bullion  by  weight 
in  their  respective  moneys  of  account.  It  has  always  been  so 
expressed ;  and  the  coinage  of  every  country  in  Europe  has,  for 
a  longer  period  than  five  centuries,  been  regulated  by  the  money 
of  account  of  each  respectively.  We  can  now  readily  refer,  in 
various  authors,  to  the  price  of  gold  per  ounce,  or  pound,  from 
the  year  1350  to  the  present  time.  The  English  sovereign,  now 
the  legal  equivalent  for  a  pound  sterling,  is  a  coin  of  the  recent 
date  of  1816. 

For  many  centuries  previous  to  1816,  the  pound  sterling  of 
account  had  no  representative  in  the  coin.  An  attempt  was 
made  to  furnish  one  in  the  guinea.  But  the  price  of  gold  was 
then  too  fluctuating,  or  the  quantity  of  gold  it  required  was  not 
properly  adjusted.  This  coin  was  quoted  at  various  prices  in 
the  money  of  account,  until  it  was  finally  fixed,  when  Sir  Isaac 
Newton  was  Master  of  the  mint,  at  twenty-one  shillings.  It  had 
ranged  previously  between  twenty-two  and  thirty  shillings. 

So  much  docs  the  history  of  English  coinage  abound  in  proof 
that  the  government  has,  for  centuries  past,  fixed  the  price  of 
the  precious  metals  in  coins,  that  it  seems  strange  it  could  ever 
have  been  denied  or  doubted.  It  can  be  denied  by  those  only 
who  cannot  conceive  of  coins  as  anything  else  than  a  measure 
of  value,  not  measurable  by  anything  else.  Those  who  cannot 
conceive  of  a  pound  sterling  as  having  any  other  meaning  than 
twenty  silver  shillings,  or  four  crown  pieces,  or  a  sovereign,  in 
gold ;  or  who  cannot  conceive  of  a  shilling  as  having  any  other 
significance  than  the  silver  that  is  in  a  shilling,  cannot  of  course 
understand  how  these  mint  regulations  fix  the  price  of  gold  and 
silver.  A  reference  to  the  history  of  English  coinage  reveals 
that  the  terms,  pounds,  shillings  and  pence,  have  long  been  em 
ployed  to  express  values  in  a  way  that  shows  them  to  have  a 


ENGLISH    RATE    OF    FOREIGN    COINS.  131 

meaning  wholly  independent  of  coinage.  The  value  denoted  by 
these  terms  has,  in  fact,  furnished  the  sole  mode  of  regulating 
the  weight  and  denominations  of  the  coins.1 

1  On  the  29th  of  January,  1660,  in  the  reign  of  Charles  II.,  a  royal  pro 
clamation  was  issued,  fixing  the  price  at  which  a  variety  of  foreign  coins 
should  be  as  current  as  sterling  money  of  England ;  as  follows :  — 

Weight.  Price. 

Gold    f  The  SPanish  or  French  Quadruple  Pistole...  17  dwts.  8  grs.  ...  £3    4s.  Orf. 

i  Double  Gold  Ducat 4     "   12     "    ...  —  18*.  Qd. 

Q.,          f  Mexican  Dollar,  or  piece  of  eight 17      "  —     "    ...  —    4s.  9  c?. 

r    (Ducatoon1 20      "   16     "    ...  —    5s.  9d. 

In  the  year  1661,  in  August,  another  proclamation  fixed  the  rates  at 
which  various  coins  should  be  current  within  the  realm ;  as  follows :  — 

The  Unite  now  current  at  22s.  Qd.  to  be  current  at  23».  Gd. 
Double  Crown   "  Us.  Od.      "  "  Us.  9rf. 

Thistle      "        «  4s.  4ft*.    "  "  4s.  Srf.Q 

In  June,  1683,  another  proclamation  was  issued,  fixing  the  price  of 
foreign  coins.  We  give  the  following  as  specimens :  — 

Weight.  Price. 

The  Golden  Rider 6  dwts.  12  grs £1     2s.     Qd. 

Quadruple  Pistole 17      "        4      "     3  10s.     3rf. 

Double  Pistole 8      «     14      "     1  15s.     - 

Ducat 2      "        6      "     —     9s.     — 3 

In  1688,  the  same  coins  were,  by  another  proclamation,  made  current 
respectively  as  follows :  —  £1  4s.,  £3  16s.,  £1  18s.,  and  £0  10s. 

In  1695,  Parliament  resolved,  on  the  15th  of  February,  that  guineas 
should  not  pass  above  the  rate  of  28  shillings.  In  a  few  weeks  afterwards, 
the  rate  was  lowered,  by  the  same  authority,  to  26  shillings.  In  1698,  the 
House  of  Commons  resolved  that  "  no  person  shall  be  obliged  to  take 
guineas  at  22  shillings  a-piece."  4 

In  1717,  the  price  of  guineas  was  declared  to  be  21  shillings.  A  propor 
tionable  rate  was  fixed  on  other  gold  coins,  and  they  were,  for  the  first  time, 
made  a  legal  tender.5 

In  September,  1737,  the  following  prices  were  affixed,  by  royal  procla 
mation,  to  various  coins :  — 

Weight.  Price. 

Guinea —  dwts.  —  grs £1     2s.     9d. 

Moidore 6      «      22      "     1     9s.     3d. 

Quadruple  Pistole 17      "        8      "     3  13*.    — 

Louis  d'Or .     5      "        5      "     .  1     2s.     — 6 


1  Pauling's  Annals  of  Coinage,  vol.  ii.  p.  3.  -  Ibid.  p.  5.  *  Ibid.  p.  19. 

4  Ibid.  p.  46.  5  Ibid.  p.  66.     Lord  Liverpool's  Coins  of  the  Realm,  p.  84. 

'  Ruding's  Annals  of  Coinage,  vol.  ii.  p.  77. 


132  BRITISH    COINAGE    ADJUSTED 

In  Great  Britain  the  uniform  practice  has  been,  for  centuries, 
to  fix  the  price  of  coins,  both  foreign  and  domestic,  by  law.  The 
history  of  British  coinage  abounds  in  illustrations  of  the  mis 
chiefs  resulting  from  this  policy;  and  also  in  proofs  that  the 
money  of  account  was  employed  in  the  arrangements  of  the  coin 
age,  but  without  a  clear  conception  of  its  character  and  proper 
functions.  The  price  of  all  coins,  foreign  and  domestic,  was 
fixed  by  law ;  and  the  weight  of  coins  was  made,  in  the  mint, 
to  conform  in  the  minutest  fraction  to  values  expressed  in 

In  1770,  a  new  coinage  of  gold  was  made,  at  the  rate  of  44J  guineas  to 
the  pound  Troy.  And  of  silver,  at  the  rate  of  62  shillings  to  the  pound 
Troy.1 

In  1797,  a  new  gold  coin  was  issued,  weighing  1  dwt.  19TV/0°ff  grains, 
which  was  proclaimed  current  at  7  shillings.2 

In  1816,  it  was  enacted  by  Parliament  that  silver  should  be  coined  into 
66  shillings  to  the  pound  Troy;  crowns,  half  crowns,  and  sixpences,  to  be 
at  the  same  rate.  Silver  was  not  then  worth  66  shillings  the  pound,  though 
made  a  legal  tender  at  that  rate.  This  over-valuation  has  saved  the  British 
silver  coinage  from  exportation,  and  from  the  melting  pot ;  whilst  its  being 
restricted,  as  a  legal  tender,  to  40  shillings  has  prevented  any  abuse  from 
its  being  offered  in  large  sums.  This  coinage  was  completed  in  1817 ;  and, 
by  proclamation  of  that  date,  it  was  ordained  that  these  new  coins  should, 
on  and  after  the  13th  of  February  of  that  year,  be  lawful  money  of  Great 
Britain.3 

On  the  1st  of  July  of  the  same  year,  a  new  gold  coin  was  made  current 
'  by  royal  proclamation :  —  "  Each  piece  was  to  be  of  the  value  of  20  shil 
lings,  and  of  the  weight  of  5  dwts.  3T20704o  grains ;  the  piece  to  be  called  a 
sovereign,  or  20  shilling  piece,  and  to  pass  and  be  received  as  of  the  value 
of  20  shillings  of  lawful  money  of  Great  Britain  and  Ireland,  in  all  pay 
ments  whatsoever."  4 

In  May,  1821,  a  royal  proclamation  was  issued,  repeating  the  above  order 
as  to  the  value  and  weight  of  the  sovereign.  On  the  accession  of  William 
IV.,  the  value  and  weight  of  the  gold  and  silver  coinage  was  again  esta 
blished  as  above. 

On  the  8th  of  July,  1838,  in  the  second  year  of  Victoria,  the  value  and 
weight  of  the  gold  coins  were  declared  to  be  as  follows:  —  Double  sove 
reigns,  10  dwts.  5  grains ;  sovereigns,  5  dwts.  2£  grains  ;  half  sovereigns, 
2  dwts.  13$  grains.  This  exhibits  a  slight  decrease  in  weight,  the  legal 
price  being  the  same.5 


1  Ruding's  Annala  of  Coinage,  vol.  ii.  pp.  82-3.  2  Ibid.  p.  96. 

3  Ibid.  p.  116.  4  Ibid.  p.  121.  •  Ibid.  p.  132. 


TO    THE    MONEY    OF    ACCOUNT.  133 

money  of  account.  Undoubtedly,  the  expressions  of  value  thus 
affixed  to  specific  quantities  of  gold  and  silver  were  regarded  as 
perfectly  definite  and  intelligible.  The  meaning  of  the  royal 
proclamations,  and  acts  of  Parliament,  were  fully  comprehended, 
whether  they  declared  a  guinea  to  be  of  the  value  of  20,  or  21, 
or  22,  or  25,  or  30  shillings.  The  language  of  the  money  of 
account  was  used,  therefore,  to  mark  and  designate  the  legal 
value  of  any  particular  coin.  It  was,  in  fact,  the  only  means 
the  public  authorities  had  to  make  known  the  value  of  a  coin ; 
for,  after  coins  are  once  introduced,  the  people  lose  the  habit 
of  expressing  the  value  of  the  precious  metals  by  weight.  They 
take  the  fixed  weight  in  the  coins,  and  the  price  fixed  by  law, 
and  thus  lose  sight  of  the  distinction  between  coins  and  money 
of  account. 

Whether  the  original  subdivision  of  the  pound  of  silver,  in  the 
English  and  French  coinage,  was  governed  by  a  money  of  account 
then  existing,  we  need  not  inquire ;  but  it  is  very  certain  a  money 
of  account  proceeded  from  that  coinage.  If  the  coins  at  first 
only  corresponded  with  known  weights,  and  if  they  were  passed 
merely  as  equivalents,  by  specific  exchange,  for  other  articles, 
that  state  of  things  only  lasted  until  pounds  and  shillings,  or 
sols,  came  to  be  impressed  on  the  public  mind  as  a  money  of 
account ;  and  from  that  time  the  coins  would  be,  and  were  really 
valued  in  the  money  of  account.  All  prices  thereafter  would  be 
expressed  in  money  of  account,  and  coins  would  be  merely  pieces 
of  gold  or  silver,  with  a  public  certificate  of  weight  and  quality, 
subject  to  rise  and  fall  in  price  as  any  other  commodity :  that 
is,  if  any  change  in  price  or  market  value  took  place,  the  money 
of  account  would  register  it,  as  in  the  case  of  other  articles. 
But  if,  in  this  state  of  things,  the  government  again  intervened, 
and,  availing  itself  of  the  already  formed  money  of  account, 
decreed  that  certain  coins  should  be  a  legal  tender  at  a  certain 
rate  or  price,  then,  from  that  time,  the  law  made  those  coins 
receivable  for  a  fixed  sum  or  price,  whatever  may  be  their 
actual  value.  From  that  time  their  variations  in  market  value 
could  only  be  followed  by  those  skilled  in  the  mysteries  of  foreign 
exchange,  or  who  were  familiar  with  the  necessary  distinctions 


134  COINS    ARE    ONLY    REQUIRED 

between  coins  and  money  of  account.  The  fact  that  a  coin  was 
made,  by  law,  a  tender  for  the  same  amount  of  debt,  however  its 
value  might  change,  would  have  strongly  tended  to  prevent  such 
coin  from  varying  in  price.  The  law  in  such  cases,  however,  can 
not  permanently  give  a  value  to  coins  much  above  the  intrinsic 
worth  of  the  metal  contained  in  them.  Every  attempt  at  this 
has  failed.  The  money  of  account,  in  such  cases,  may  be  de 
stroyed  and  reconstructed  according  to  the  new  coinage  ;  but  if 
not,  it  will  ultimately  vindicate  its  functions,  and  both  mark  and 
express  the  true  value  of  every  coin,  whatever  the  alterations  it 
may  have  undergone.  It  is  true  that  a  coinage  used  for  the 
purposes  of  change  may,  to  a  small  amount,  be  sustained  by  law 
at  a  point  above  its  intrinsic  value,  as  is  the  case  now  with  the 
English  silver  coinage,  which  is  a  legal  tender  to  the  amount  of 
only  forty  shillings,  and  of  our  silver  coinage  under  a  dollar. 
And  this  may,  no  doubt,  be  done  in  the  same  way,  and  for  the- 
same  purpose,  anywhere,  if  the  over-valuation  does  not  exceed 
the  cost  of  coinage.  To  this  extent  only,  indeed,  can  coin  be 
rescued  from  the  laws  which  govern  bullion.  Where  coin  is 
occasionally  employed  in  the  large  operations  of  commerce,  it 
has  ever  been,  and  must  ever  be,  mainly  regarded  as  bullion. 

The  test  of  exportation  must  always  bring  it  to  its  market 
value  as  bullion.  The  moment  it  becomes,  in  the  course  of  trade 
or  foreign  expenditure,  the  interest  of  merchants  to  export 
bullion,  it  must  go,  and  it  can  only  go  at  its  value  as  bullion. 
The  mints  of  France,  England,  and  other  countries,  have  been 
employed  for  centuries  in  coining  gold  and  silver,  only  to  find 
their  coins  passing  from  one  to  the  other  for  recoinage.  Im 
mense  sums  have  thus  been  wasted  in  the  expenses  of  coinage, 
for  no  good  end  whatever.  Coins  are  only  useful  in  the  retail 
trade,  and  they  can  only  be  retained  in  circulation  by  placing 
upon  them  the  full  expense  of  coinage.  It  is  perfectly  right 
that  the  retail  trade,  which  requires  these  coins,  should  bear 
the  whole  expense  of  coinage  ;  the  convenience  and  advan 
tage  of  coins  in  that  trade  fully  justifies  a  deduction  from 
the  coins  of  the  full  cost  of  the  labor  bestowed  upon  them. 
But,  in  large  operations  in  the  precious  metals,  coins  are 


IN  THE  RETAIL  TRADE.  135 

not  needed ;  and  the  expense  of  coinage  is,  therefore,  wholly 
lost. 

In  small  transactions  coins  are  not  only  useful,  but  nearly 
indispensable ;  they  have,  therefore,  a  special  value  for  that 
purpose.  In  large  transactions  ingots  are  more  convenient  than 
coin,  because  weighing  is  less  troublesome  than  counting ;  be 
cause  there  is  less  danger  of  counterfeits ;  and  because  there  is 
no  complication  between  the  legal  and  the  market  price. 

It  results,  from  this  view  of  the  subject,  that  coinage  should 
be  confined,  as  nearly  as  possible,  to  the  amount  required  for 
the  retail  trade ;  that,  to  prevent  its  being  melted  at  home  or 
recoined  abroad,  the  whole  expense  of  coinage  should  be  de 
ducted  from  the  coins ;  that  the  legal  tender  of  coins  thus  over 
valued  should  not  exceed  a  small  sum,  in  coins  of  silver,  and  an 
amount  somewhat  larger,  in  coins  of  gold.  This  being  arranged, 
both  gold  and  silver,  in  bars  assayed  and  stamped  at  the  mint, 
should  be  a  legal  tender,  at  the  market  price,  in  payment  of  all 
debts.  Foreign  coins  should  of  course  be  regarded  as  bullion, 
and  be  a  legal  tender  at  the  market  rate. 

With  this  very  simple  and  natural  arrangement,  an  abundance 
of  coin  might  at  all  times  be  secured  for  the  retail  trade ;  be 
cause  it  would  never,  in  the  first  instance,  be  sought  for  exporta 
tion.  The  precious  metals,  freed  from  arbitrary  valuations  by 
law,  would  in  all  large  transactions  fall  into  the  regular  chan 
nels  of  trade,  and  become  subject  to  the  laws  of  supply  and 
demand.  None  of  those  extraordinary  and  often  mysterious 
movements  irt  bullion  and  coin,  which  now  frequently  take 
place,  could  occur ;  for  the  price  of  gold  and  silver  would  be 
governed  constantly  by  the  exigencies  of  the  demand.  When 
required  to  liquidate  a  balance  of  trade,  it  would  be  purchased 
just  as  bills  of  exchange  are  for  the  same  purpose.  There  is  no 
more  reason  why  he  who  must  remit  for  goods  purchased  in 
foreign  countries  should  have  gold  or  silver  at  a  fixed  price, 
than  that  he  should  have  flour  or  cotton,  if  he  find  it  for  his 
advantage  to  make  his  remittances  in  those  commodities.  Under 
such  regulations,  no  country  could  drain  off  the  precious  metals 


136  OBJECTION    CONSIDERED. 

from  another,  by  any  device,  without  paying  the  price  caused  by 
their  demand. 

The  difficulty  of  ascertaining  the  price  of  gold  and  silver  may 
seem  to  be  a  serious  objection.  All  who  are  familiar  with  deal 
ings  in  bullion  know  that  this  is  in  reality  no  serious  difficulty, 
as  nothing  is  more  easily  ascertained  in  trade  than  the  price  of 
bullion ;  and  it  would  be  still  more  easily  known,  if  all  opera 
tions  in  bullion  were  only  at  the  market  price,  instead  of  being 
complicated  with  coins  upon  which  the  government  has  placed  a 
fixed  price.  The  fluctuations  of  bullion,  especially  in  the  great 
marts  of  foreign  trade-,  would  be  greater  than  under  the  present 
system,  as  they  should  be,  for  they  should  obey  the  law  of 
prices.  As  no  man  would  be  disposed  to  keep  the  precious 
metals  idle,  because  they  are  unproductive,  they  would  be  con 
tinually  pressing  on  the  market  when  the  demand  was  small, 
and  prices  would  recede ;  so,  when  the  demand  was  large, 
buyers  would  advance  the  price  to  obtain  the  required  supply. 
But  these  advanced  prices  would  only  be  paid  by  those  who 
needed  them.  All  others  would  be  unaffected  by  the  advance. 
Just  as  high  rates  of  interest  or  exchange  affect  mainly  those 
who  borrow  money,  or  purchase  bills  of  exchange.  In  truth,  no 
difficulty  of  ascertaining  the  market  price  of  bullion,  if  left  free 
to  find  its  own  rate,  could  be  compared  with  the  difficulty  of 
adjusting  mint  prices  so  as  to  avoid,  at  times,  the  exportation 
of  coins,  or  their  being  melted  down,  if  under- valued,  or  of  their 
being  thrown  back  into  the  circulation  in  undue  quantities  when 
over- valued.  The  difficulties  of  the  fixed  price  of  coins  have, 
indeed,  exceeded  any  that  could  arise  under  the  system  pro 
posed:  under  the  system  of  fixed  prices,  the  whole  subject 
becomes  too  complicated  for  the  comprehension  of  any  but  the 
shrewdest  bankers  and  dealers  in  bullion,  who  become  thus 
enabled  to  seize  upon  advantages  and  profits  which  do  not 
belong  to  any  regular  operation  of  commerce.  When  the  mar 
ket  price  of  bullion  shall  be  the  law  of  all  its  movements,  every 
business  man  will  understand  why  it  goes  and  why  it  comes, 
and  may  govern  himself  accordingly,  so  far  as  his  interests  may 
be  involved.  There  is  no  more  reason,  beyond  the  mere  de- 


FRENCH    COINAGE.  137 

mands  of  the  retail  trade,  for  fixing  the  price  of  gold  and  sil 
ver  by  law,  than  for  fixing  the  price,  in  the  same  way,  of  bread 
and  meat. 

|  2.  Coinage  —  French  coinage  —  Debasement,  frauds,  disturbed  money  of 
account  —  System  of  the  United  States  —  Act  of  Congress  of  1792, 
adopting  the  dollar  unit  —  Price  of  gold  fixed  —  Results  —  Act  of  June, 
1834,  reducing  weight  of  gold  coins  —  Result  —  Act  of  February,  1853 — . 
Silver  coinage  —  Ingots  of  gold  —  Export  of  silver. 

We  have,  for  the  sake  of  distinctness,  and  to  avoid  confusion, 
drawn  the  preceding  illustrations  chiefly  from  British  coinage 
and  money  of  account.  The  lessons  to  be  drawn  from  those  of 
France  are  not  less  instructive.  We  need  not,  however,  refer 
to  them  for  the  same  purpose.  The  debasement  of  the  coins  was 
carried  much  farther  in  France  than  in  England.  The  coinage 
and  moneys  of  account,  in  both  countries,  began  with  the  pound 
weight  of  silver  —  in  France  the  pound  marc,  and  in  England 
the  tower  pound.  In  France,  the  livre  of  1789  contained  only 
the  seventy-eighth  part  of  the  original  livre  of  Charlemagne,  in 
the  year  800  :  in  England,  silver  coins  which  would  be  the  equi 
valent  of  the  pound  unit,  or  pound  sterling,  exceed  only  by  a 
little  a  quarter  of  the  original  quantity. 

Such  a  succession  of  frauds  as  this  debasement  of  the  French 
coins  implies  must  have  inflicted  upon  the  people  a  series  of 
losses  equal  to  the  devastations  of  many  civil  wars.  Whatever 
profit  kings  or  governments  may  have  gained  by  frauds  of  this 
kind,  must  have  been  more  than  equalled  by  those  of  bankers 
and  merchants.  What  the  government  gained  would  always,  in 
fact,  be  the  least  part  of  what  the  people  would  lose ;  for,  upon 
such  occasions,  the  sharks  found  among  money-changers  seize  the 
occasion  to  fleece  both  government  and  people.  Whenever  the 
money  of  account  is  disturbed,  as  it  always  is  when  a  currency 
of  debased  coins  is  enforced  by  authority,  or,  in  modern  lan 
guage,  made  a  legal  tender,  the  language  of  prices  becomes  so 
confused,  that  men  no  longer  understand  each  other.  Very  few 
can  so  clearly  comprehend  the  actual  state  of  things  as  to  guard 
their  own  interests ;  some  there  are,  however,  who,  from  position 


138  PUBLIC    FRAUDS    IN    COINAGE. 

and  special  skill,  are  always  able  not  only  to  ward  off  the  mis 
chief,  but  to  make  such  gains,  on  occasions  of  this  kind,  as  no 
legitimate  business  ever  affords. 

What  such  frauds  have  done  in  France,  they  have  done  every 
where  else.  The  law  of  legal  tender,  or  enforced  currency,  is 
the  basis  on  which  these  frauds  have  rested.  Without  such  aid, 
they  could  never  have  been  so  largely  perpetrated :  coins 
reduced  in  weight,  or  with  undue  portion  of  alloy,  would  have 
found,  very  soon,  their  true  market  value,  and  been  kept  to  it. 
A  few  might  be  deceived,  but  the  money  of  account,  being  un 
disturbed,  would  at  once  serve  to  mark  distinctly,  and  express 
openly,  the  proper  price  of  the  altered  coin. 

All  such  debasements  of  coin  by  authority  proceed  upon  the 
ground  that  the  government  having  previously  fixed  the  price  of 
certain  quantities  or  coins  of  the  precious  metals  by  law,  it  is 
safe  and  practicable  to  make  a  less  quantity  bear  the  same 
price. 

The  history  of  coinage  for  nearly  ten  centuries  is  a  history  of 
public  frauds  and  private  injuries ;  of  confusion  in  prices  and  in 
moneys  of  account ;  of  immense  gains,  as  well  as  losses,  by  gov 
ernments,  and  still  heavier  losses,  without  any  gains,  by  the 
people.  These  mischiefs  may  be  credited,  without  hesitation,  to 
the  continued  effort  to  maintain  a  fixed  price  and  forced  circula 
tion  for  coins,  and  to  the  fraudulent  debasements  to  which  these 
efforts  opened  a  door,  and  offered  a  temptation.  This  history 
affords  no  lessons  more  worth  remembering  than  that  govern 
ments  should  not  and  cannot  fix  the  price  of  the  precious  metals, 
even  in  coins,  beyond  the  demand  of  the  retail  trade :  that  there 
should  not  be  any  other  price  for  the  precious  metals,  whether 
coined  or  uncoined,  in  the  large  transactions  of  commerce,  than 
that  which  is  made  by  the  law  of  prices  and  the  course  of 
trade.  The  history  of  money  shows  that  few  greater  grievances 
can  befall  a  people  than  a  deranged  coinage  and  money  of 
account:  few  evils  have  drawn  from  the  masses  of  a  nation 
more  bitter  complaints.  But  for  the  great  advantage  of  coins 
in  small  transactions,  it  had  been  far  better  that  no  mint  had 
ever  existed. 


SYSTEM  OF  UNITED  STATES.         139 

It  should  not  be  lost  sight  of,  then,  that  a  fall  in  the  price  of 
gold  or  silver,  where  they  are  made  a  legal  tender  at  a  fixed 
price,  is  equivalent  to  a  corresponding  debasement  of  the  coins. 
Although  no  government  may  be  responsible,  the  mischiefs  are 
equally  great,  and  fall  largely  upon  the  unwary,  or  those  who 
cannot  help  themselves.  In  such  cases,  also,  sharp  and  skilful 
dealers  in  money  reap  a  vast  harvest  of  profits  before  people  at 
large  are  on  their  guard. 

The  period  of  public  frauds  by  coinage  had  nearly  elapsed 
before  our  nation  came  into  existence.  The  progress  of  civiliza 
tion  had  put  an  end  to  the  deliberate  issue  of  counterfeits  of 
their  own  coins  by  the  governments  of  Europe.  Other  modes 
of  extracting  money  from  the  people  were  discovered,  more  effi 
cient  and  less  disgraceful.  But  with  the  frauds  the  difficulties 
did  not  disappear,  and  these  were  found  to  be  sufficient  to  puzzle 
the  shrewdest  statesmen  of  the  day.  Unfortunately  for  clear 
views  of  the  subject,  the  policy  of  a  fixed  price  for  coins  was 
persevered  in  with  a  pertinacity  which  denoted  that  it  was 
regarded  as  the  indispensable  accompaniment  of  a  sound  system 
of  coinage  and  money.  It  became  a  settled  opinion,  that  the 
system  of  coinage  which  was  adapted  to  the  merest  retail  trade 
would  equally  suit  the  larger  operations  of  foreign  commerce 
and  wholesale  transactions.  As  well  might  men  have  attempted 
to  carry  on  the  transportation  by  sea  and  land,  which  the  larger 
movements  of  trade  involve,  in  their  pockets,  as  to  have  resorted 
to  the  same  medium  of  exchange,  managed  in  the  same  way,  for 
the  largest  and  smallest  transactions  of  commerce. 

The  mischievous  absurdity  of  a  fixed  price  for  the  coins  of  a 
country  has  never  been  accepted  by  merchants  and  bankers  in 
large  transactions,  except  to  take  some  advantage  by  it.  Fluc 
tuations  in  the  price  of  the  precious  metals  operating  upon  coins, 
as  well  as  bullion,  widely  and  effectively,  have  too  long  been  a 
mystery  to  the  people  at  large.  Coinage,  without  preventing 
fluctuation,  assists  in  concealing  the  cause ;  and  fluctuations 
defy  and  derange  all  the  nicely-adjusted  valuations  of  the 
mints  of  the  world,  which  may  one  month  be  correct  to  the 
nicest  attainable  fraction,  and  in  the  next  be  so  far  wrong  as  to 


140  ACT    OF    CONGRESS    OF    1792 

drive  the  whole  of  a  coinage  of  gold  or  silver  out  of  a  country 
in  a  few  months.  Men  are  lost  in  conjectures  at  such  move 
ments,  when  the  productions  of  a  score  of  years  of  the  vast 
and  multifarious  machinery  of  a  mint,  millions  upon  millions  of 
exquisitely  executed  coins,  are  carried  away,  and  without  hesi 
tation  consigned  to  foreign  crucibles  to  be  recoined,  and  not 
long  afterwards  subjected  to  a  similar  process  at  another  mint. 
Thus  modern  mints  are  kept  in  constant  activity,  using  each 
other's  finished  products  as  raw  material. 

In  all  this  policy  and  its  results,  the  United  States  have  had 
their  full  share.  The  earliest  legislation  of  Congress,  on  the  sub 
ject  of  a  mint,  was  the  act  of  April,  1792.  By  this  act  it  is 
established :  — "  That  the  money  of  account  of  the  United 
States  shall  be  expressed  in  dollars  or  units,  dimes  or  tenths, 
cents  or  hundredths,  and  mills  or  thousandths ;  a  dime  being 
the  tenth  part  of  a  dollar,  a  cent  the  hundredth  part  of  a  dol 
lar,  &c. ;  and  that  all  accounts  in  the  public  offices,  and  all  pro 
ceedings  in  the  courts  of  the  United  States,  shall  be  kept  and 
had  in  conformity  to  this  regulation."  l 

This  is,  perhaps,  the  first  time  that  a  money  of  account  was 
ever  enacted  or  established  by  any  public  authority,  as  an  act 
of  power.  Moneys  of  account  had,  in  all  nations,  grown  up  in 
the  commercial  and  mental  habits  of  the  people.  The  dollar 
unit  was  employed  by  Spanish  nations,  to  some  extent,  as  a 
money  of  account ;  but  it  was  not  that  chiefly  used.  The 
Spanish  dollar,  however,  was  a  well-known  coin ;  and  the  dollar 
unit  was  one  familiar  to  many  people  of  the  United  States 
before  and  during  our  struggle  for  independence.  It  was 
wisely  adopted  as  the  unit  of  our  money  of  account,  because 
of  the  great  diversity  of  moneys  of  account  prevailing  in  the 
States  at  that  time,  and  the  great  need  of  having  one  uniform 
system  of  reckoning  and  keeping  accounts  throughout  the 
whole  nation.  It  was  wisely  chosen,  because  no  other  could 
have  been  brought  into  use  so  soon.  It  required,  however, 

1  See  Laws  of  the  United  States,  and  History  of  Mint  Regulations,  in 
Adams'  Report  on  Weights  and  Measures,  pp.  143  to  152. 


ADOPTS  A  MONEY  OF  ACCOUNT.       141 

with  all  this  previous  familiarity,  from  twenty-five  to  forty 
years  to  introduce  the  present  system  into  general  use.1 

The  word  "dollar"  employed  as  above  by  the  Congress  of 
1792,  and  made  the  unit  of  our  money  of  account,  had  a  mean 
ing  perfectly  apprehended  at  the  time.  It  was  not  the  dollar 
coin  which  was  made  the  unit ;  the  word  dollar  was  made  the 
unit,  and  this  unit  was  made  decimally  divisible.  This  word 
dollar  "  expressed"  a  value  which  was  then,  as  it  is  now,  well 
understood.  It  was  understood  just  as  the  term  pound  was 
in  Pennsylvania.  If  Congress  had  enacted  that  the  term 
pound,  as  employed  in  the  currency  of  Pennsylvania,  should  be 
the  unit,  it  would  have  been  perfectly  comprehended,  though 
there  never  had  been  a  coin  of  silver  or  gold  corresponding  to 
that  pound,  or  half,  or  quarter,  or  any  decimal  part  thereof. 

This  act  of  Congress  provides  for  a  coinage  of  both  silver  and 
gold:  —  " Dollars,  or  units,  each  to  be  of  the  value  of  a  Spanish 
milled  dollar,  as  the  same  is  now  current,  and  to  contain  371T4,j 
grains  of  pure,  or  416  grains  of  standard  silver."  Other  silver 
coins,  less  than  a  dollar,  to  be  in  proportion.  "  Eagles  each  to 
be  of  the  value  of  ten  dollars,  and  to  contain  247|  grains  of 
pure,  or  270  grains  of  standard  gold."  Half  eagles  to  be  in 
proportion.  This  statute  then  declares  and  establishes  that 
371y4<5  grains  of  pure,  and  416  grains  of  standard  silver,  shall  be 
current  as  money  at  the  price  of  one  dollar,  the  value  of  the 
unit  of  the  money  of  account.  Also,  that  the  price  of  247| 
grains  of  pure,  and  270  grains  of  standard  gold  shall  be  ten 
dollars,  and  that  the  price  of  half  of  those  quantities  shall  be 
five  dollars.  It  further  declares:  —  "  That  the  proportional 
value  of  gold  to  silver,  in  all  coins  which  shall  be  current  as 
money  within  the  United  States,  shall  be  as  fifteen  to  one, 
according  to  quantity  in  weight  of  pure  gold  or  pure  silver ; 
that  is  to  say,  every  fifteen  pounds  of  pure  silver  shall  be  of 
equal  value,  in  all  payments,  with  one  pound  weight  of  pure 
gold,  and  so  in  proportion." 

1  See  extracts  from  "  Bankers'  Magazine,"  ante,  page  88,  for  a  more 
full  account  of  the  adoption  of  the  dollar  unit. 


142    COINS  OF  UNITED  STATES  ADJUSTED. 

This  statute  not  only  fixes  and  expresses  the  price  of  silver 
and  gold  coins  in  the  money  of  account  it  adopts,  but  it  fixes 
the  exact  proportion  between  gold  and  silver,  and  enacts  that  a 
pound  of  gold  shall  be  worth  fifteen  pounds  of  silver.  In 
this,  Congress  acted  in  accordance  with  prevalent  opinions  of 
that  day  —  opinions  not  entirely  surrendered  by  many,  even  to 
this  time.  It  is  obvious,  however,  that  the  proportion  between 
gold  and  silver  cannot  be  settled  by  any  statutory  regulation. 
It  must  remain  subject  to  the  course  of  trade,  and  whatsoever 
else  influences  the  market  price  of  one  or  the  other  of  these 
metals.  It  belongs  neither  to  the  authority,  nor  to  the  power 
of  any  one  nation  to  adjust  that  proportion  by  law;  nor,  indeed, 
is  it  in  the  power  of  the  political  authorities  of  all  nations 
combined  to  make  or  enforce  any  such  arbitrary  adjustment. 
The  whole  subject  belongs  to  trade,  and  the  markets  of  the 
world. 

The  language  of  the  statute  to  which  we  have  referred,  fixing 
the  price  of  247|  grains  of  fine  gold  at  ten  dollars,  could  only  be 
operative  in  the  United  States,  and  even  there  only  to  a  limited 
extent ;  so,  also,  the  provision  that  the  price  of  371T4jj  grains 
of  pure  silver  shall  be  one  dollar.  It  is  true  that  these  fixed 
prices,  taken  in  connection  with  the  further  provision,  "That 
all  the  gold  and  silver  coins  which  shall  be  struck  at  and  issued 
from  said  mint  shall  be  a  lawful  tender  in  all  payments  whatso 
ever,  those  of  full  weight  according  to  the  respective  values 
hereinbefore  declared,  and  those  of  less  than  full  weight  at  values 
proportionate  to  their  respective  weights" — must  have  been 
regarded  as  valid  in  the  United  States,  to  the  extent  of  enabling 
debtors  to  discharge  debts  at  those  fixed  rates  of  gold  and  silver. 
But  they  could  not  compel  men  to  accommodate  all  their  prices 
and  dealings  to  these  fixed  statutory  rates.  They  were  only 
binding  as  to  debts  contracted  ;  and  men  might,  if  they  chose, 
refuse  to  buy  or  sell  on  credit  with  reference  to  those  rates.  In 
all  the  large  operations  of  commerce  and  exchange,  these  statu 
tory  prices  of  gold  and  silver  are  disregarded,  and  that  of  the 
public  market  governs. 

The  result,  after  this  enactment,  proved  that  the  adjustment 


ACTS    OF    CONGRESS    OF    1834    AND    1837.         143 

between  gold  and  silver  was  wrong,  and  that  the  price  of  gold 
was  fixed  at  a  rate  lower  than  the  current  price  of  the  market. 
As  a  consequence  of  this  legislative  error,  gold  ceased  to  circu 
late  as  money  in  the  United  States  in  any  considerable  quanti 
ties.  This  continued  to  be  the  case  down  to  the  year  1834, 
when  the  price  of  gold  was  corrected.  By  a  statute  bearing 
date  the  28th  of  June,  it  was  declared  that  the  eagle  should 
thenceforth  be  coined  to  weigh  258  grains,  instead  of  270  grains 
as  before,  of  which  232  grains  were  to  be  fine  gold,  instead  of 
247J  as  before.  This  statute  fixed  the  price  of  232  grains  of 
fine  gold  at  ten  dollars,  which  was  an  advance  upon  the  former 
rate  of  over  six  and  a  half  per  cent. ;  that  is,  that  proportion  of 
fine  gold  was,  in  the  coinage  of  1834,  withdrawn  from  the  ten 
dollar  piece.  This  rate  of  gold  raised  the  proportion  of  gold  to 
silver  to  about  sixteen  for  one.  The  provisions  of  this  act  were 
incorporated  in  that  of  January  18th,  1837,  which  is  a  consoli 
dation  of  the  laws  pertaining  to  the  mint.  It  makes  the  new 
gold  coins  a  legal  tender  for  the  same  sum  expressed  in  the 
money  of  account,  for  which  they  were  a  legal  tender  before  the 
weight  was  thus  reduced. 

Under  this  adjustment,  gold  and  silver  coins  circulated  con 
currently  for  some  years,  and  the  coinage  of  gold  was  quadru 
pled.  But  the  mischief  of  a  fixed  legal  price  was  again 
strongly  exemplified  when  the  gold  began  to  come  in  freely 
from  California.  The  tendency  of  this  large  addition  to  the 
supply  was  to  reduce  the  price.  Whilst  the  law  afiected  to  hold 
the  price  of  gold  unchanged,  the  sudden  and  rapid  departure 
of  the  silver  revealed  unmistakeably  the  fact  that  gold  had 
fallen  in  price  in  the  general  market,  and  that  it  was  now 
over-valued  in  our  coinage.  This  cause  has  continued  to  ope 
rate,  until  all  our  own  silver  coins,  and  all  the  Mexican,  South 
American  and  Spanish  coins  of  full  weight  have  been  exported. 
For  a  time  we  had  no  silver  coins  but  the  worn  foreign  and 
domestic  coins,  which  were  deteriorated  to  the  extent  of  from 
five  to  twenty  per  cent.  The  foreign  deteriorated  silver  coins 
had  previously  almost  wholly  disappeared;  but  the  departure 
of  the  full  weight  coins  speedily  brought  them  again  to  light. 


1-14  ACT    OF    CONGRESS    OF    1853. 

They   became   a   necessity ;   but   were,    nevertheless,   such   an 
annoyance  as  called  for  another  act  of  Congress. 

The  act  of  the  21st  of  February,  1853,  provided  for  a  coin 
age  of  half  dollars,  quarters,  dimes  and  half  dimes ;  it  pre 
scribed  that  the  half  dollars  should  be  of  the  weight  of  192 
grains,  instead  of  the  former  weight  of  206J  grains,  and  the 
lesser  coins  in  that  proportion ;  but  it  only  made  these  coins  a 
legal  tender  to  the  amount  of  five  dollars.  This  was  a  with 
drawal  of  more  than  seven  per  cent,  of  the  fine  metal  from  the 
half  dollar  coin,  and  the  lesser  coins  ;  and,  in  fact,  fixed  the 
price  of  the  coins  thus  affected  over  seven  per  cent,  higher  than 
their  previous  legal  price.  This  measure  was  adopted  and  car 
ried  into  effect  in  time  to  save  the  small  change  of  our  retail 
trade  from  being  wholly  carried  off.  The  demand  for  small 
money  has  kept  these  coins  up  to  their  nominal  value ;  and 
their  high  nominal  rate  has  prevented  their  being  melted 
down,  or  exported  as  bullion.  The  principle  which  dictated 
this  successful  measure  is  that  which  ought  to  govern  the 
whole  policy  of  coinage,  so  far  as  coinage  is  expedient.  Of  the 
great  coinage  of  California  gold  which  has  so  magnified  the 
operations  of  our  mint  of  late  years,  but  a  small  part  retains 
the  form  and  weights  of  our  coins.  This  wasteful  policy  has  at 
length  in  part  been  abandoned,  and  gold  is  now  issued  in  bars 
or  ingots. 

The  ingots  from  the  mint  being  all  of  the  same  quality  or 
standard,  the  price  depends  wholly  upon  the  course  of  trade. 
The  market  price  of  bullion  in  England,  France  and  the  United 
States  mainly  governs  all  the  large  operations  in  the  precious 
metals  in  these  countries.  Yet  the  fixed  legal  price  has,  in 
some  conditions  of  the  market  rates,  a  disturbing  effect,  the 
extent  of  which  can  scarcely  be  estimated.  The  vast  and 
extraordinary  drain  of  silver  from  America  and  Europe  to  Asia 
and  Africa,  which  has  been  going  on  for  several  years,  and 
which  is  so  much  lamented  by  many,  could  not  have  taken 
place  but  for  the  policy  of  the  fixed  legal  price  for  gold.  That 
gold  has  depreciated,  to  some  extent,  under  its  extraordinary 
influx  from  Australia  and  California,  is  just  as  certain  as  that 


RESULT     OF    THIS    LEGISLATION.  145 

the  silver  has  departed,  and  is  departing.  But  whilst  the  laws 
are  ineffectual  to  prevent  gold  from  falling  in  price  or  value, 
they  are  efficient  in  enabling  the  dealers  to  exchange  it  for  the 
silver  which  is  exported.  So  long  as  the  law  makes  the  depre 
ciated  gold  a  legal  tender  in  payment  of  all  debts,  so  long 
debtors  will  use  it  to  pay  their  debts.  A  depreciated  medium, 
if  it  circulates  at  all  times,  and  especially  if  it  circulates  under 
the  sanction  of  the  law,  will  supersede  every  better  medium. 
Previous  to  1834  we  under-rated  gold,  and  we  could  keep  none; 
now  we  over-rate  gold,  and  we  have  nothing  else.  Thus  the 
rates  fixed  by  law  on  the  precious  metals,  beyond  the  demand  of 
the  retail  trade,  are  only  available  for  disturbance  and  evil,  and 
for  no  good  purpose  or  end. 

Under  the  rule,  or  policy,  of  allowing  the  market  price  to 
govern  the  whole  movement  of  the  precious  metals,  a  great  dis 
placement,  like  that  of  the  departure  of  silver  from  Europe, 
could  never  take  place.  The  price  of  silver,  as  compared  with 
gold,  would  rise  according  to  the  demand,  so  as  eventually  to 
check  the  movement.  The  two  metals,  disturbed  in  their  mu 
tual  relations,  would  immediately  find  a  proportion  suited  to  the 
occasion.  If  the  present  policy  of  the  Western  powers  is  per 
severed  in,  and  if  the  supply  of  gold  continues  unabated,  their 
whole  stock  of  silver  must  be  exported.  They  will  continue  to 
accept  gold,  which  has  greatly  fallen  in  value,  for  their  silver 
at  the  old  rate.  It  will  not  be  difficult,  hereafter,  to  estimate 
the  loss  which  this  great  exchange  of  silver  for  gold  is  entailing 
upon  the  countries  which  are  its  victims.  It  cannot  but  be 
enormous  directly,  but,  perhaps,  indirectly  far  heavier.  If  the 
depreciation  of  gold  continues,  the  holders  of  gold  will  have  the 
whole  loss  to  bear ;  and  as  our  silver  will  be  gone,  we  shall  be 
the  losers.  All  the  moneys  of  account,  in  countries  making 
gold  a  legal  tender,  will  be  changed.  The  whole  range  of 
prices  will  have  to  be  modified,  and  immense  losses  will  be  sus 
tained  upon  all  the  investments  payable  in  dollars,  pounds  and 
francs.  If  this  change  could  be  fully  appreciated  and  under 
stood  by  those  whom  it  may  affect,  the  mischiefs  would  be  less, 
for  much  might  be  done  to  distribute  and  equalize  the  loss. 
10 


146  NOTE    TO    CHAPTER    IV. 

But  heretofore  it  lias  been  the  case  that  such  occasions  are 
seized  upon  by  the  knowing  ones  to  enrich  themselves  at  the 
expense  of  the  community. 


NOTE    TO    CHAPTER   IV. 

EXTRACTS 

From  an  Article,  by  tlie  Author  of  this  Volume,  in  "  Hunt's  Merchants' 
Magazine,"  of  April,  1852. 

THE    EARL   OF   LIVERPOOL  —  BRITISH    SYSTEM   OF   COIN 
AGE    ADOPTED    IN    1816. 

"WHEN"  gold  had  thus  been  introduced  into  general  use,  it  soon  pre 
sented  the  difficulty  of  light  coins.  It  became  a  regular  business  with  a 
certain  class  of  dealers  in  coins,  to  seize  upon  the  heavy  or  new  coins  as 
fast  as  they  were  issued  from  the  mint,  by  purchasing  them  at  a  slight  pre 
mium,  which  they  recovered,  with  a  fair  profit,  by  abstracting  from  the 
heavy  coins  as  much  as  they  safely  could,  and  in  that  state  returning  them 
to  circulation.  They  were  always  receiving  heavy  coins,  and  always  pay 
ing  away  light  ones :  the  mint  was  furnished  with  abundant  employment 
in  recoining  the  same  gold,  and  the  clippers  had  a  regular  harvest  in  their 
business.  The  precautions  in  the  recoinage  of  1774  in  a  good  degree 
avoided  this  evil ;  and  the  Earl  of  Liverpool,  to  whom  the  nation  was  in 
debted  for  that  measure,  appears  not  to  have  lost  sight  of  the  subject,  until, 
in  1805,  he  addressed  his  well-known  letter  to  the  King,  since  called  '  A 
Treatise  on  the  Coins  of  the  Realm/  This  is  very  elaborate  in  its  detail 
of  the  facts  on  which  he  founded  his  proposed  measure.  He  admits  that 
the  change  he  advocates  should  not  be  made  upon  slight  grounds.  It  was 
a  change  from  the  double  standard  to  one  of  gold,  with  an  over-valuation 
of  silver  in  the  coinage,  but  restricting  the  amount  to  be  paid  in  it  to  forty 
shillings.  Gold  coin  was  to  be  made  a  legal  tender  at  the  rate  of  £3  17s. 
lOJcZ.  per  ounce,  and  the  sovereign,  which  was  to  represent  the  pound,  was 
made  to  correspond  with  that  rate  per  ounce.  To  induce  the  adoption  of 
this  measure,  Lord  Liverpool  drew  up  his  letter,  of  236  quarto  pages,  in 
•which  he  reviews  the  whole  history  of  British  coinage,  and  adds  an  appen 
dix,  containing  an  account  of  the  relative  values  of  gold  and  silver  among 
the  ancient  Persians,  Greeks,  and  Romans.  This  performance  is  very  relia 
ble,  as  far  as  the  facts  and  estimates  made  in  it  are  concerned ;  but  its 
authority  in  doctrine  has  been  called  in  question.  He  had,  however,  chiefly 
in  view  the  adoption  of  the  measure :  he  did  not  attempt  to  produce  a 
general  and  scientific  work  upon  coinage.  He  adopts  the  old  notion,  that 


NOTE    TO    CHAPTER    IV.  117 

the  '  money  or  coin  of  a  country  is  the  standard  measure  by  which  the 
value  of  all  things  bought  and  sold  is  regulated  and  ascertained  ;  and  it  is 
in  itself,  at  the  same  time,  the  value  or  equivalent  for  which  goods  are  ex 
changed,  and  in  which  contracts  are  generally  made  payable.'  This  pro 
position,  so  far  as  money  is  alleged  to  be  a  measure  of  value,  is  rejected  by 
M'Culloch,  and  other  noted  authorities.  The  former  says :  —  'A  coin  is 
merely  a  piece  of  metal  of  a  known  weight  and  fineness.'  —  'It  has  been  said 
to  be  both  a  sign  and  a  measure  of  value ;  in  truth,  it  is  neither.'  —  'It  is 
equally  incorrect  to  call  money  a  measure  of  value.  Gold  and  silver  do  not 
measure  the  value  of  commodities  more  than  the  latter  measures  the  value 
of  gold  and  silver.  When  one  commodity  is  exchanged  for  another,  each 
measures  the  value  of  the  other.'  —  Encyclo.  Britaimica,  Art.  '  Money.' 
But  whatever  objections  have  been  raised  against  the  Earl  of  Liverpool's 
definitions,  it  is  conceded  that,  since  his  measure  was  adopted,  no  proposi 
tion  should  be  entertained  of  another  change. 

"  The  Earl  of  Liverpool  having  shown  that  silver  was  the  real  or  practi 
cal  standard  down  to  the  beginning  of  the  18th  century,  alleges  that  it  gra 
dually  ceased  to  be  such,  and  that  gold,  during  that  century,  became  the 
actual  standard.  In  his  language,  '  Gold  coins  are  now  become,  in  the 
opinion  and  practice  of  the  people,  the  principal  measure  of  property.'  l 
'And  it  may  therefore  be  inferred  that,  in  the  opinion  of  the  dealers  in  these 
precious  metals  (who  must  be  considered  the  be^  judges  on  a  subject  of 
this  nature),  the  gold  coin  has,  in  this  respect,  become  the  principal  mea 
sure  of  property,  and,  consequently,  the  instrument  of  commerce.'  lie  sub 
joins,  '  that  the  foreign  nations  who  have  any  intercourse  with  us,  and  even 
those  who  deal  in  the  precious  metals  of  which  our  coins  are  made,  concur 
in  this  opinion.'  At  a  subsequent  page  (170),  he  states  this  position,  and 
illustrates  it  at  large.  '  The  gold  coins  have,  in  fact,  become,  for  almost  a 
century,  the  mercantile  money  of  the  kingdom.' 

"  In  answer  to  the  objection,  '  That,  by  declaring  the  gold  coin  to  be  at 
present  the  principal  measure  of  property,  an  alteration  will  be  made  in  all 
bargains,  and  in  the  terms  of  all  covenants  and  contracts  which  were  con 
cluded  when  the  silver  coins  were  understood  to  be  the  principal  measure 
of  property,'  he  admits  '  This  objection  might  have  some  weight,  if  the 
change  had  happened  of  late  years  only ;  but  it  has  been  already  shown 
that  it  has  existed,  and  that  all  payments  have  been  regulated  in  conformity 
to  it  for  almost  a  century.  This  objection  might  also  have  weight,  if  this 
change  had  been  brought  about  by  the  authority  of  government.  It  has 
been  shown  that  it  was  brought  about,  not  by  the  authority  of  government, 
but  by  the  course  of  events,  with  the  acquiescence,  and,  I  may  say,  the 
general  consent  of  the  people.'  (p.  173.)  Ho  dwells  upon  this  gradual  adop 
tion  of  the  gold  standard  by  the  people,  and  argues,  from  a  great  variety  of 
facts  and  considerations,  that  his  proposition  involved  no  actual  change  in 

1  "  Treatise  on  the  Coins  of  the  Realm,"  pp.  139,  145. 


148  NOTE    TO    CHAPTER    IV. 

the  accustomed  use  of  money ;  that,  consequently,  contracts  could  not  he 
affected,  the  measure  being  chiefly  a  legal  recognition  of  existing  mercan 
tile  usage. 

"The  Earl  of  Liverpool,  in  support  of  his  plan,  lays  no  small  stress  upon 
the  fact  that  Great  Britain,  being  the  chief  commercial  mart  of  the  world, 
it  is  especially  fitting  that,  while  people  less  rich  should  retain  silver  as 
their  standard,  a  country  so  important  should  adopt  gold.  This  idea  is 
repeated,  in  the  course  of  his  work,  in  a  way  that  shows  it  was  a  favorite 
notion.  The  glory  of  a  gold  medium,  however,  was  fraught  with  mischief 
which  Great  Britain,  with  all  her  wealth,  could  neither  wholly  pre>jent  nor 
repel.  By  the  adoption  of  his  plan,  the  Bank  of  England  was  compelled  to 
redeem  its  notes  in  gold  —  a  commodity  subject  to  exceeding  irregularity 
of  demand,  and  consequent  fluctuation  in  value.  Every  war  and  every  com 
mercial  crisis  on  the  continent  of  Europe  brought  a  demand  for  gold  on  that 
bank.  Gold  being  so  much  more  readily  transported  than  silver,  every  un 
favorable  balance  of  trade  among  neighboring  countries  might  bring  a  cir 
cuitous  demand  upon  an  institution  which  was  the  only  one  in  Europe 
compelled  to  pay  in  gold  at  a  fixed  price.  Every  unfavorable  harvest,  and 
consequent  large  importation  of  wheat,  entailed  a  corresponding  demand 
for  gold,  which  could  be  carried  off  with  facility,  when  silver  might  not  have 
been  touched.  In  all  such  matters  of  payment,  the  party  receiving  makes 
choice  of  that  which  si^s  him  best ;  and  certainly  no  greater  facility  can 
be  afforded  to  a  foreign  creditor  than  to  pay  him  in  gold,  at  a  fixed  rate, 
from  which  it  cannot  rise,  however  brisk  the  demand.  Thus  was  the  Bank 
of  England  made  the  great  depository  of  gold,  to  which  it  flowed  from  all 
quarters  when  not  wanted,  and  from  which  it  was  taken  to  any  quarter  of 
the  world  where  there  might  be  any  special  demand  or  occasion  for  it. 
There  could  have  been  no  objection  to  this  ebbing  and  flowing,  if  the  bank 
had  been  merely  a  dealer  in  gold  bullion,  buying  at  a  low  rate  when  it  was 
not  in  demand,  and  selling  at  a  profit  when  there  was  a  demand.  The  bank 
had  no  privilege  but  that  of  purchasing  all  that  came  at  <£3  17s.  9cZ:,  and 
paying  to  all  that  demanded  at  the  rate  of  £3  17s.  W^d.  per  ounce;  but  being 
the  issuer  of  the  principal  paper  currency  of  Great  Britain,  they  were  bound 
to  redeem  (after  the  resumption  of  specie  payments  in  1822)  at  that  price. 
It  was  a  hazardous  experiment  to  make  the  Bank  of  England  the  only  place 
at  which  gold  could  always  be  had  at  a  fixed  price,  and  to  make  gold  the 
basis  of  the  English  bank-note  currency  ;  so  that  every  regular  and  irregu 
lar  demand  for  gold  at  once  affected  the  condition  of  the  British  paper  cur 
rency,  and  through  it  the  whole  industry  and  trade  of  the  country,  although 
neither  may  have  had  anything  to  do  with  the  demand  for  gold.  Those  who 
are  familiar  with  the  history  of  that  bank,  which  has,  perhaps,  been  more 
wisely  managed  than  any  similar  institution,  can  readily  recall  instances 
when  the  bank,  to  save  their  gold,  were  obliged  to  restrict  their  issues,  until 
distress,  injury,  and  ruin  befell  thousands  upon  thousands  of  people  who 


NOTE    TO     CHAPTER    IV.  149 

had  no  share  in  the  cause  of  the  mischief.  For  every  million  of  gold  that 
the  bank  could  thus  retain  in  their  coffers,  they  would  be  compelled  to  with 
draw  very  many  millions  of  currency  from  the  ordinary  channels  of  busi 
ness.  If  this  evil  is  inseparable  from  a  paper  currency,  it  was  surely  unwise 
to  aggravate  it  by  subjecting  the  Bank  of  England  to  the  payment  of  notes 
and  deposits  in  that  metal  which  is  most  easily  carried  off,  and  most  liable 
to  variable  and  extraordinary  demands ;  and,  moreover,  to  redeem  notes  at 
a  fixed  rate  in  an  article-  notoriously  fluctuating  in  its  value  all  over  the 
world.  If  the  bank  has  been  able  to  struggle  through  all  the  commercial 
storms  which  have  swept  over  the  world  since  1822,  it  is  well  known  at 
what  repeated  and  immense  sacrifices  to  the  nation ;  and  that,  upon  a  recent 
occasion,  to  resort  to  the  Bank  of  France  for  aid  became  a  matter  of  neces 
sity.  A  very  large  portion  of  the  evils  of  this  struggle  would  have  been 
saved,  if  the  bank  had  been  allowed  the  privilege  of  paying  in  silver ;  and 
still  more,  if  permitted  to  pay  in  gold  at  a  market  instead  of  a  mint  price. 

System  of  coinage  in  the  United  States  —  Double  standard  —  Proposed  adop 
tion  of  single  standard  of  gold,  as  a  remedy  for  scarcity  of  silver  —  Reduc 
tion  in  the  value  of  our  silver  coins. 

"  We  have  already  adverted  to  our  adoption  of  the  dollar  for  a  unit  of 
computation  and  money  of  account,  as  a  measure  justified  by  the  necessity 
of  reconciling  the  currencies  of  the  different  States,  and  also  by  the  fact  of 
its  being  already  familiar  to  the  minds  of  the  people.  In  fact,  although 
different  moneys  of  account  prevailed  in  different  groups  of  the  States,  they 
were  all  about  equally  familiar  with  the  Spanish  coin  of  a  dollar,  and  its 
parts ;  and  these  were  the  only  coins  with  which  they  were  familiar.  They 
had  long  estimated  in  pounds,  shillings  and  pence,  and,  when  they  em 
ployed  them  at  all,  paid  in  foreign  coins.  There  was,  therefore,  a  very 
good  preparation  in  the  employment  of  these  coins  for  more  than  a  century 
by  the  colonists,  for  the  adoption  of  the  dollar  as  the  money  unit.  This 
was  done  under  the  confederation,  although  no  mint  was  established,  by 
act  of  Congress,  until  April,  1792.  By  this  statute  it  was  enacted  :  — 
*  That  the  money  of  account  of  the  United  States  shall  be  expressed  in  dol 
lars  or  units,  dimes  or  tenths,  cents  or  hundredths,  and  mills  or  thou 
sandths.'  !  That  the  '  dollars  or  units  each  be  of  the  value  of  a  Spanish 
milled  dollar,  as  the  same  is  now  current,  and  to  contain  371  /s  grains  of 
pure,  or  416  grains  of  standard  silver.' 2  By  the  same  law  the  eagle,  then 
first  provided  for,  was  to  be  '  of  the  value  of  ten  dollars  or  units,  and  to 
contain  247  f  grains  of  pure,  and  270  grains  of  standard  gold.'  It  is  now 
nearly  sixty  years  since  the  passage  of  this  act,  and  the  dollar  coin  then 
ordered  and  provided  for  still  contains  the  same  quantity  of  pure  silver  — 
371£  grains  —  and  so  far  its  value  remains  unchanged.  By  degrees  it  has 

1  Section  20.  2  Section  9. 


150  NOTE    TO    CHAPTER    IV. 

expelled  the  old  moneys  of  account ;  it  being  rather  rare,  at  this  day,  to 
hear  of  pounds,  shillings  and  pence,  except  in  the  State  of  New  York,  in 
which  the  Spanish  eighth  of  a  dollar  corresponds  to  the  shilling,  and  the 
hundredth  to  the  penny.  The  fact  of  the  people  there  adhering  to  the  terras 
shilling  and  penny,  against  the  usages  of  the  rest  of  the  country,  shows  with 
what  pertinacity  men  cling  to  their  money  of  account.  The  only  alteration 
which  has  taken  place  in  our  established  dollar  coin  was  by  the  act  of  Con 
gress  of  1834,  which  directed  that  3|  grains  of  the  alloy  be  withdrawn, 
reducing  its  weight  from  416  to  412J  grains.  The  coins  of  both  metals 
were,  by  the  act  of  1792,  to  be  a  legal  tender ;  the  dollars  at  '  their  current 
value,  and  gold  at  the  rate  of  24|  grains  for  a  dollar/  As  it  almost  invaria 
bly  happens,  where  the  double  standard  prevails,  one  of  the  metals  was 
over-valued,  or  one  was  under-valued,  as  compared  with  the  current  market 
value  in  commerce.  In  our  case  the  gold  was  under-valued,  for  it  never 
circulated  concurrently  with  silver  until  after  the  act  of  1834,  which  raised 
the  mint  price  of  gold  over  6J  per  cent,  by  rating  23 j2^  grains  of  gold  at 
the  value  of  a  dollar,  instead  of  24|  grains,  as  fixed  by  the  act  of  1792. 
Even  after  this  increase  of  6i  per  cent,  in  the  mint  price  of  gold,  it  failed 
to  become  a  currency  in  this  country  until  it  began  to  flow  in  so  rapidly 
from  California,  that  an  actual  depreciation  of  several  per  cent,  took  place. 
The  consequence  was,  that  the  silver  in  our  banks  began  to  be  rapidly 
shipped  off  to  Europe  —  a  drain  which  did  not  cease  so  long  as  silver  could 
be  obtained.  It  is,  in  tAth,  impossible  to  adjust  the  relative  value  of  gold 
and  silver  by  any  legal  enactments,  in  such  manner  as  to  overcome  the  in 
fluence  of  the  market  rates  of  those  metals.  It  has  long  been  deemed  absurd 
to  fix  the  prices  of  other  commodities  by  law  ;  perhaps  the  time  is  not  dis 
tant  when  it  will  be  regarded  as  absurd  to  fix  an  unchangeable  price  upon 
an  ounce  of  gold,  as  upon  a  bushel  of  wheat,  or  a  day's  labor. 

"  The  history  of  commerce  certainly  discloses  that  the  changes  in  the 
value  of  gold  have  been  remarkable  and  frequent  in  all  periods  of  which 
we  have  authentic  records,  and  not  less  so  in  the  last  half  century.  We 
have  already  mentioned  that,  between  1802  and  1810,  gold  rose  to  20  per 
cent,  above  the  mint  price ;  but  we  add,  to  show  the  superior  steadiness 
of  silver,  that  the  variation  in  price  of  Spanish  dollars  at  the  Bank  of  Eng 
land  was  less  than  2  per  cent.,  and  in  that  period  the  bank  purchased  to 
the  extent  of  seventy  millions  of  ounces. 

"  It  has  been  proposed,  for  the  purpose  of  remedying  the  scarcity  of  sil 
ver,  which  the  recent  depreciation  of  gold  has  withdrawn  from  circulation, 
to  reduce  the  weight  of  standard  silver  in  our  dollar  from  412^  grains  to 
384  grains ;  that  is,  to  take  from  it  25TYj  grains  of  pure  silver,  thus  re 
ducing  its  intrinsic  value  6.91  per  cent.  It  is  said  this  debasement  is  only 
to  be  applied  to  the  fractions  of  a  dollar .  It  may  be  that  no  evil  would 
ensue  from  such  a  change,  especially  if  confined  to  quarters,  dimes,  and 
half  dimes,  and  if  they  were  not  made  a  legal  tender  beyond  five,  or,  at 


NOTE    TO    CHAPTER    IV.  151 

most,  ten  dollars.  The  use  of  these  small  coins  could  scarcely  impair  the 
dollar  unit.  But  the  measure  does  not  appear  by  any  means  commensurate 
with  the  evil.  It  would  still  be  found  that  silver  was  scarce;  and  if  these 
debased  coins  were  increased  in  quantity  beyond  the  mere  demand  for 
change,  they  would  depreciate  to  their  bullion  value,  and  become  a  nuisance. 

"It  appears  more  natural,  as  well  as  advantageous,  to  look  for  the  remedy 
on  the  side  whence  the  grievance  comes.  The  scarcity  of  silver  has  arisen 
from  the  depreciation  of  gold  ;  and  that  by  reason  of  its  abundance,  more 
than  from  any  special  demand  for  silver,  or  any  increase  in  the  value.  In 
stead,  therefore,  of  disturbing  our  silver  coinage,  so  intimately  connected 
•with  our  money  of  account,  would  it  not  be  safer  to  confine  any  measure 
intended  to  meet  the  present  difficulty  to  gold,  the  fall  in  value  of  which 
has  occasioned  the  exportation  of  our  silver  ?  If  the  matter  had  been  un 
derstood  in  time,  a  very  simple  measure  would  have  prevented  the  shipment 
of  silver.  Gold  had  depreciated,  but  the  legal  price  remained ;  and  the 
silver  was  rapidly  carried  off  before  the  banks  were  supplied  with  gold,  and 
before  they  were  fully  aware  of  the  depreciation. 

"  If,  at  the  moment  the  silver  began  to  disappear,  Congress  had  inter 
vened,  and  repealed  so  much  of  the  act  of  1834  as  made  gold  a  legal  ten 
der  at  the  rate  of  23T252^  grains  to  the  dollar,  gold,  which  was  flowing  upon 
us  from  ths  Pacific,  would  have  instantly  sunk  to  its  market  value,  and 
have  become  the  preferable  remittance,  more  especially  as  Great  Britain 
adheres  to  a  fixed  price  for  gold.  • 

"  A  fixed  relation  between  gold  and  silver,  an  established  legal  price  for 
both  on  the  assumption  that  they  will  not  change  in  their  relation  to  each 
other,  and  that  the  value  of  each  must  remain  unchanged,  is  a  policy  so 
mistaken,  that  it  should  not  stand  long  on  any  statute-book  ;  but,  least  of 
all,  should  it  be  upheld  in  the  face  of  facts  which  clearly  exhibit  that  one 
of  the  precious  rnetals  has  actually  changed  its  value  materially,  and  must 
soon,  by  the  inevitable  laws  of  trade,  undergo  a  more  important  change. 
It  requires  no  very  strong  effort  of  thought  to  perceive  that  a  people  who 
attempt  to  uphold  the  price  of  a  metal  which  has  permanently  fallen  in. 
value,  will  be  abundantly  supplied  with  the  article  they  continue  to  over 
value.  This  very  fact  destroys  what  is  called  the  double  standard,  and 
substitutes  the  depreciated  single  one.  If  this  were  the  whole  mischief,  it 
would  be  small ;  but  the  mass  of  the  people  continue  to  reckon  and  esti 
mate  in  the  long  established  money  of  account,  whilst  payments,  until  the 
proper  remedy  is  applied,  continue  to  be  made  in  the  depreciated  coin. 
The  double  standard  may  exist  for  a  long  time  without  inflicting  any  spe 
cial  injury  beyond  the  confusion  of  ideas  which  it  creates;  but  when  the 
fluctuation  of  either  metal  commences,  injustice  is  flagrant  on  every  side. 
It  is  as  if  the  parties  in  trade  were  provided  with  one  measure  to  make 
their  purchases,  and  another  of  different  capacity  by  which  to  make  their 
sales ;  and  this  not  according  to  a  uniform  practice,  but  according  to  every 


152  NOTE    TO    CHAPTER    IV. 

man's  knowledge,  cunning,  capacity,  and  the  grade  of  his  morals.  Tho 
double  standard  becomes,  upon  an  occasion  like  the  present,  when  not  an 
intelligent  doubt  can  be  entertained  of  an  early  depreciation  of  gold,  a  posi 
tive  and  impending  evil  of  a  magnitude  not  easily  estimated,  but  which  can 
scarcely  be  over-rated.  As  little  time  as  possible  should  be  lost  in  removing 
it,  because  in  commerce,  as  well  as  in  other  occupations  of  life,  '  coming 
events  cast  their  shadows  before  ;'  and  because,  while  the  shrewd  and 
well-informed  will  '  stand  from  under,7  and  avoid  the  mischief,  the  unwary 
and  uninformed  will  be  made  to  suffer  and  become  the  prey  of  those  who 
can,  under  cover  of  law,  make  a  business  of  fraud. 

"  The  double  standard,  absurd  at  all  times,  and  specially  objectionable  in 
the  anticipation  of  a  considerable  decline  in  the  price  of  gold,  is,  however, 
immeasurably  less  objectionable  than  the  adoption  of  a  single  standard  of 
gold  in  our  present  circumstances,  even  when  we  leave  out  of  view  the 
money  of  account,  and  the  infinity  of  commercial  considerations  connected 
with  it,  and  regard  the  change  to  be  made  merely  in  the  light  of  a  standard. 
If  it  be,  as  most  of  the  approved  writers  on  money  suppose,  that  prices  are 
strict  comparisons  with  coins  —  that  sales  are  only  made  with  reference  to 
coins — what  must  be  pronounced  of  the  policy  which  rejects  the  metal 
which  is  unmoved,  and  takes  that  for  a  standard  which  is  in  the  very  act 
of  going  down?  With  what  degree  of  accuracy  can  the  masses  of  people 
in  the  United  States  keep  pace  with  the  decline  which  may  take  place  in 
gold?  This  decline  may^at  times,  proceed  by  slow  and  imperceptible  de 
grees,  and  at  times,  according  to  the  accidents  or  movements  of  trade,  by 
jerks.  In  either  case,  but  a  very  small  number  of  men  will  be  able  to  ap 
preciate  its  downward  progress.  The  public  will  only  register  it  by  their 
losses;  and  their  eyes  will  only  open  when  it  is  too  late.  It  is  more  than 
probable  that  the  dealers  in  bullion  in  London  \vould  first  perceive  and  take 
advantage  of  every  step  in  this  depreciation. 

"  It  would  be  a  misfortune  of  no  small  moment  if,  in  place  of  the  double 
standard,  our  past  system  had  been  the  single  gold  standard,  as  it  is  in 
Great  Britain.  We  should  now  be  trembling  with  apprehension  of  the -de 
cline  of  gold,  and  all  the  innumerable  and  injurious  results  which  such  a 
decline  in  the  value  of  a  standard  metal  imposes.  That  these  apprehen 
sions  are  now  felt  in  an  eminent  degree  in  England,  is  abundantly  plain  to 
all  who  are  observant  of  financial  and  pecuniary  affairs  in  that  country. 
Many  there  know  that  danger  is  imminent,  and  rejoice  that  the  demand  for 
gold  on  the  continent  postponed  the  expected  mischief.  But  the  gold  is  now 
returning,  and  the  Bank  of  England  is  now  stocked  with  it  beyond  all  pre 
cedent.  This  influx  upon  that  bank  must  continue,  unless  partially  inter 
fered  with  by  wars,  or  anticipations  of  wars,  on  the  continent.  So  long  as 
the  bank  continues  to  give,  as  compelled  by  law,  £3  17s.  9d.  for  gold,  it 
will,  under  the  depreciating  process,  flow  there  from  all  quarters  of  the 
world,  until  the  government  repeals  this  awkward  obligation. 


NOTE    TO    CHAPTER    IV.  153 

"  As  this  subject  is  viewed  by  many  of  the  ablest  men  in  England,  it 
seems  surrounded  with  insuperable  difficulties,  and  impenetrable  darkness. 
And  yet,  if  the  doctrine  and  functions  of  a  money  of  account  were  tho 
roughly  studied,  the  remedy  for  the  whole  anticipated  evil  would  be  far 
more  simple  and  easy  of  accomplishment  than  many  duties  the  government 
has  to  perform.  Let  the  bank  be  released  from  the  obligation  to  take  gold, 
and  let  the  mint  price  be  repealed,  that  gold  may  take  its  value  in  the  mar 
ket  with  silver.  The  English  money  of  account  will  safely  and  effectually 
register  all  prices  and  values,  preserve  unchanged  all  contracts,  salaries 
and  annuities,  and  permit  the  vast  concerns  of  the  British  Treasury  and 
British  industry  and  trade  to  proceed  undisturbed  in  their  accustomed 
channels.  It  would  be  necessary  to  connect  this  measure,  at  no  distant 
day,  with  another  for  the  special  protection  of  the  money  of  account.  The 
responsibility  of  vigilance,  in  regard  to  the  money  of  account,  might  bo 
placed  upon  the  Chancellor  of  the  Exchequer ;  constant  observation  of  the 
value  of  silver  bullion,  and  proper  restraints  upon  the  quantity  of  bank 
paper  circulation,  would  keep  the  money  of  account  unchanged.  Expe 
rience  would  show  whether  this  system  might  not  be  continued  indefinitely, 
and  it  would  at  least  afford  time  to  devise  other  appropriate  remedies  for 
the  evil.  If  the  money  of  account  could  maintain  itself  unchanged,  with 
an  almost  exclusive  paper  circulation,  during  the  first  twelve  years  of  the 
suspension  of  payments  by  the  bank  in  1797,  surely  the  same,  and  even  a 
much  better  result,  could  be  obtained  by  a  \vell-flevised  measure  now,  when 
the  bank  is  able  to  pay  every  demand  in  gold.  At  till  events,  those  who 
can  repose  no  confidence  in  such  an  arrangement,  might  feel  very  safe  if 
their  bank  paper  was  kept  at  par  with  silver  bullion  until  time  had  pointed 
out  some  better  plan.  This  would  not  be  changing,  as  some  may  think, 
from  the  gold  to  the  silver  standard;  it  would  be  simply  dispensing  with 
any  standard,  except  the  mint  standard  for  coinage.  And  this,  as  we  con 
tend,  is  what  the  mental  habits  of  trading  people  lead  them  to  do,  be  the 
law  of  the  money  standard,  or  standard  of  payment,  what  it  may. 

"It  is  difficult  to  conceive  how  any  one  could  have  thought  of  dispensing 
•with  our  silver  standard,  and  adopting  the  single  gold  standard  in  the 
United  States,  at  this  moment  of  expected  depreciation  of  that  metal,  unless 
the  suggestion  came  from  England.  That  they  may  want  companions  in 
their  trouble  is  not  at  all  improbable ;  but  that  we  should  volunteer  that 
sacrifice  is  past  comprehension.  If  England  continues,  in  spite  of  common 
sense  and  commercial  prudence,  to  pay  the  same  price  for  gold  after  it  be 
gins  to  depreciate,  she  will  receive  it  as  long  as  she  has  anything  to  give 
for  it,  until  she  is  bursting  with  gold  at  every  pore ;  and  when  the  plethora 
can  be  endured  no  longer,  and  the  hour  of  depletion  arrives,  then  a  heavy 
loss  will  accrue,  and  ruin  will  overtake  multitudes  through  its  effects  upon 
the  Bank  of  England. 

"  If  the  United  States  should  adopt  the  single  gold  standard  with  our 


154  NOTE    TO    CHAPTER    IV. 

present  legal  or  mint  price,  a  portion  of  that  loss  would  be  thrown  upon  us. 
It  is  true,  the  laws  of  trade  very  often  obviate,  for  a  time,  the  natural  con 
sequences  of  unwise  legislation,  or  the  most  absurd  commercial  blunders. 
At  the  present  moment  we  are  under  such  heavy  indebtedness  to  England 
for  goods  imported  in  excess  of  the  value  of  our  exports,  that  we  have  all 
the  advantage  of  the  game  in  gold.  We  are  paying  in  a  depreciating 
metal ;  but  our  merchants  who  are  trading  with  California  are  receiving 
payment  in  the  same  falling  commodity,  If  we  adopt  the  gold  standard 
now,  we  might  not  suffer  immediate  injury,  owing  to  our  indebtedness;  but 
we  should  enter  upon  a  game  of  agiotage  and  profit  and  loss  with  the  Bank 
of  England  and  the  great  merchants  of  London,  in  which,  according  to  our 
past  experience,  we  should  come  out  heavy  losers.  The  retention  of  our 
double  standard,  with  a  fixed  price  of  gold,  may  involve  many  and  serious 
mischiefs  in  our  domestic  trade,  but  cannot  affect  us  injuriously  in  our 
foreign  trade  so  long  as  we  are  indebted  abroad,  and  our  banks  retain  the 
privilege  of  paying  in  gold.  In  case,  however,  of  a  favorable  balance  with 
any  country  in  the  world,  our  remittances  would  all  come  in  the  depreciated 
metal.  The  further  this  subject  is  pursued,  the  more  clearly  will  it  be  seen 
to  be  the  undoubted  policy  of  both  England  and  the  United  States  to  repeal 
the  fixed  price  of  gold,  and  make  it  a  tender  only  at  the  market  price.  This 
is  a  favorable  time  to  make  the  change  here,  because  the  market  price  will 
not  only  be  maintained  during  the  present  adverse  exchange  with  England, 
but  if  that  exchange  continues  as  now,  it  would  inevitably  go  above  our 
mint  price :  that  is,  while,  by  the  natural  course  of  events,  gold  would  be 
depreciated  from  its  over-supply,  by  the  state  of  our  indebtedness  to  Eng 
land,  and  the  great  demand  for  funds  to  remit,  it  might  rapidly  go  to  a 
high  premium.  It  is  impossible  to  say  what  would  have  been  the  price  of 
exchange  on  England  during  the  past  year,  if  the  parties  remitting  had  not 
been  permitted  to  take  gold  and  silver  from  the  banks  at  par.  Now,  if  the 
banks  were  permitted  to  pay  in  gold  at  the  market  price,  or  the  same  price 
at  which,  from  time  to  time,  it  might  be  declared  to  be  receivable  at  the 
sub-treasuries  of  the  United  States,  we  should  be  receiving  a  premium  on 
gold  at  the  moment  when  it  might  be  intrinsically  under  par." 


CHAPTER   Y. 

\  1.  The  actual  use  made  of  coins  measures  their  importance  and  power  — 
Modes  of  payment  of  greater  efficiency  adopted  —  Each  to  be  judged  upon 
its  own  merits  —  Usages  of  trade  assign  to  coins  their  office  —  Not  a  model 
currency  —  Tliey  carry  no  higher  interest  than  a  credit  in  bank  —  The 
British  act  of  1844,  requiring  the  issues  of  the  bank  to  fluctuate  as  gold  — 
Sir  Robert  Peel  —  Lord  Overtom  —  Col.  Torrens  —  The  question  one  of 
commerce  and  payment — Return  to  hard  currency  impossible. 

IN  some  respects,  the  extravagant  estimate  placed  upon  gold 
and  silver,  in  their  functions  of  money,  is  not  too  great.  As 
such,  they  are  an  universal  equivalent.  Every  article  which  is 
for  sale  can  be  purchased  for  gold  or  silver.  This  is  not  true,  to 
the  same  extent,  of  any  other  commodity.  They  have  maintained 
their  place,  as  the  best  materials  for  money  and  coinage,  for 
thousands  of  years.  It  is  not  wonderful,  therefore,  that  they 
should  be  prized  as  the  chief  items  and  emblems  of  wealth. 
Their  actual  employment,  to  a  large  extent,  in  those  small  deal 
ings  which  are  immediately  connected  with  daily  living,  and 
in  all  the  details  of  food,  lodging  and  raiment,  brings  their 
importance  and  utility  home  to  all  who  purchase  such  necessa 
ries  at  pleasure,  as  well  as  to  those  who,  from  poverty,  do  not  enjoy 
that  advantage.  This,  together  with  the  fact  that  so  many 
make  no  distinction  between  money  and  money  of  account, 
creates  the  impression  that,  somehow  or  other,  all  purchases  and 
payments  are  indebted  for  their  validity  to  gold  or  silver  money; 
that,  when  not  employed  in  any  transaction,  they  are  in  some 
way  involved  and  referred  to,  is  the  firm  belief  of  multitudes. 
This  impression  can  only  be  wiped  off  by  a  full  comprehension 
of  the  office  and  functions  of  a  money  of  account.  When  this  is 
attained,  and  when  he  who  examines  this  subject  can  fully  discri 
minate  between  the  use  of  money  of  account,  by  which  prices  are 

(155) 


156       THE    POWER    OF    THE    PRECIOUS    METALS 

expressed,  and  the  use  of  coins,  by  which  payments  are  made, 
it  is  not  difficult  to  estimate  the  real  importance  of  the  precious 
metals  employed  as  a  medium  of  exchange.  We  are  disposed  to 
think  that  no  safer  or  closer  approximation  can  be  made  to  their 
importance  or  value  as  a  currency,  than  that  which  is  denoted 
by  the  actual  extent  to  which  they  are  employed.  We  do  not 
mean  to  say  that  the  manner  of  their  use  is  best,  nor  whether 
they  may  not  with  advantage  be  more  or  less  employed ;  but  we 
mean  that  the  real  extent  to  which  they  are  employed  is  the 
truest  criterion  of  their  importance  and  power  as  a  currency. 
We  have  seen  that  more  coins  are  manufactured  than  are  re 
quired,  and  that  the  chief  mints  of  the  world  have  long  been 
mainly  employed  in  working  up  the  products  of  other  mints.  Of 
course  no  exact  estimate  of  the  amount  of  coins  actually  re 
quired  for  the  business  of  a  country  can  be  made ;  but  the 
amount  must  be  exceeded,  when  large  quantities  of  coin  are 
exported,  to  be  recoined  at  foreign  mints. 

We  have  said  that  the  power  and  importance  of  gold  and  sil 
ver,  as  a  medium  of  exchange,  are  best  measured  by  their  actual 
employment  and  agency.  We  may  go  further,  and  say  that,  in 
all  those  transactions  of  trade,  foreign  and  domestic,  in  which 
the  precious  metals  are  not  employed,  they  not  only  exercise  no 
agency  whatever,  but  they  arc  not  needed.  When  we  are  con 
sidering  the  uses  to  which  the  precious  metals  are  put  as  money, 
or  a  medium  of  exchange,  whether  coined  or  uncoined,  we  should 
confine  our  views  to  their  proper  range  of  use.  And  when  we  are 
considering  that  vastly  larger  proportion  of  the  payments  of 
trade  which  are  made  without  any  agency,  direct  or  indirect,  of 
gold  or  silver,  we  should  study  the  very  processes  by  which 
these  payments  are  effected.  They  are  as  valid,  complete  and 
legitimate  as  are  the  transactions  carried  on  by  means  of  coins; 
arid,  therefore,  of  so  much  the  greater  interest,  because  that 
portion  of  commerce  which  is  effected  without  the  agency  of  the 
precious  metals,  saves  the  great  expense  of  employing  them  — 
an  economy  which  cannot  be  rated  at  less  than  ten  times  the 
whole  quantity  of  the  precious  metals  now  in- use.  So  far  as  the 
exports  of  a  country  are  made  by  bills  of  exchange,  and  other 


MEASURED  BY  THEIR  ACTUAL  AGENCY.   157 

means,  to  pay  for  its  imports,  so  far  the  payments  are  as  well 
and  effectually  made  as  the  small  balance  either  way,  which  is 
discharged  in  gold  and  silver. 

Whatever  be  the  utility  and  importance  of  the  precious  metals 
as  a  medium  of  exchange  or  an  equivalent,  their  utter  insuffi 
ciency  to  accomplish  the  payments  of  the  present  day  shows 
that,  though  they  may  never  be  wholly  dispensed  with  in  com 
merce,  their  efficacy  as  means  of  payment  has  been  so  far  trans 
cended  by  other  modes,  devices  and  contrivances,  that  nothing 
can  be  more  fallacious  than  to  regard  them  as  a  model. 
Wagons,  carts  and  wheelbarrows  were  once  the  best  vehicles  of 
transportation ;  and  in  some  places,  and  for  certain  uses,  they 
are  yet  the  best ;  but  it  would  be  signally  absurd  to  insist  that 
locomotives  should  be  carefully  regulated  in  their  construction, 
speed  and  use  on  the  model  of  wagons  and  carts  of  the  olden 
time,  or  of  those  which  are  still  in  use. 

Upon  this  subject  our  attention  should  not,  then,  be  mainly 
directed  to  silver  and  gold,  merely  because  they  were  the  ear 
liest  medium  of  exchange,  or  the  one  most  highly  prized  as  such, 
but  rather  to  the  object  to  be  effected.  We  are  not  bound  to 
employ  so  expensive  a  medium,  if  we  can  avoid  it.  In  all 
stages  of  commerce,  we  find  there  has  been  a  constant  effort  to 
dispense  entirely  with  the  use  of  the  precious  metals.  The  great 
object  of  commerce  being  not  merely  to  obtain  and  circulate 
gold  and  silver,  but  to  effect  an  exchange  of  commodities  and 
labor,  the  interchange  which  is  effected  without  any  medium  of 
intrinsic  value  must  certainly  be  much  more  economical  than 
that  in  which  the  precious  metals  must  be  employed.  When  the 
payments  of  foreign  commerce  between  two  nations  are  effected 
through  mutual  bills  of  exchange,  by  which  the  commodities  ex 
changed  pay  for  each  other,  the  dealings  between  them  are  as 
effectual  as  if  carried  on  at  every  step  by  payments  in  gold  or 
silver.  When  neighboring  tradesmen  or  merchants  deal  with 
each  other,  it  matters  not  to  what  amount,  debiting  in  their 
respective  books  of  account  the  price  of  what  they  sell  to  each 
other,  their  payments  are  made  by  simply  comparing  and  bal 
ancing  accounts.  These  modes  of  payment  are  undoubtedly  as 


158       MONEY    LESS    EFFECTIVE    IX    PAYMENTS 

effectual,  and  far  more  economical  and  rapid,  than  if  the  parties 
had  paid  the  coin  in  every  transaction.  Dealings  like  these  do 
not  require  to  be  governed  by  rules  or  considerations  which  per 
tain  to  the  circulation  of  coins.  The  precious  metals,  in  the 
shape  of  coins,  are  only  one  of  many  means  of  effecting  an  in 
terchange  of  commodities  ;  and  being  far  from  the  most  efficient, 
the  mode  of  their  operation  should  not  be  the  rule  when  they 
are  not  employed.  As  well  might  the  transportation  of  goods 
by  camels  and  carts  be  made  the  rule  for  railroads. 

The  prices  of  commerce  are  all  expressed  in  money  of  account ; 
bills  of  sale  are  all  rendered  in  money  of  account ;  bills  of  ex 
change,  and  promissory  notes,  are  for  sums  expressed  in  money 
of  account ;  books  are  so  kept ;  and  all  payments,  however 
made,  are  but  the  discharge  of  debts  ascertained  and  expressed 
in  money  of  account.  In  all  this  coins  have  nothing  to  do, 
unless  they  are  used  in  final  payment,  which  is  very  rarely  the 
case.  Gold  and  silver  being,  then,  but  one  of  many  agencies 
of  commerce,  however  necessary  and  desirable  in  their  place, 
however  appropriate  that  the  many  questions  relating  to  their 
use  be  wisely  and  skilfully  determined,  there  is  no  propriety  in 
their  being  regarded  as  models  or  guides  to  determine  questions 
arising  in  other  modes  of  payment. 

As  nearly  all  the  large  dealings  of  commerce  are  now  carried 
on,  and  the  payments  made,  without  the  use  of  any  medium  of 
exchange,  or  any  one  without  intrinsic  value,  there  is  neither 
reason  nor  logic  in  appealing  to  the  doctrine  of  gold  and  silver 
money  for  instruction  or  guidance  in  these  large  operations. 
The  necessities  of  commerce  have  revealed  cheaper  and  more 
rapid  modes  of  payments.  Men  have  availed  themselves  of  various 
agencies,  explained  hereafter,  to  set  off  the  debts  of  the  people 
in  one  country  against  the  debts  of  the  people  in  the  other.  If 
individuals  in  England  owe  to  individuals  in  the  United  States 
the  sum  of  five  millions,  and  if  individuals  in  the  latter  owe  to 
individuals  in  the  former  five  millions,  the  whole  can  be  settled 
by  bills  of  exchange,  without  the  slightest  obligations  to  or  any 
use  of  the  precious  metals.  The  merchandise  of  one  country  is, 
by  this  process,  made  to  pay  for  the  merchandise  of  the  other. 


THAN    THE    AGENCY    OF    CREDIT.  159 

No  medium  of  intrinsic  value  need  intervene.  The  parties  deal 
ing  simply  ascertain,  and  keep  some  evidence  of  their  respective 
dues,  until  the  account  between  them  can  be  balanced  or  set  off 
against  each  other.  In  such  transactions,  there  being  no  need 
of  gold  or  silver,  it  would  be  hard  to  divine  why  the  shadow 
should  intervene  where- the  substance  is  not  required.  We  can 
not  see  why,  if  gold  and  silver  cannot  be  made  to  effect  the  pay 
ments  of  commerce,  they  should  be  the  basis  of  rules  and  regu 
lations  for  payments  in  which  they  have  no  part. 

The  progress  of  business,  the  usages  of  commerce,  and  the 
requirements  of  industry,  have  in  fact  assigned  to  the  precious 
metals  their  true  place  and  office.  If  we  examine  the  position 
thus  assigned,  we  find  them  employed  as  the  small  change  of 
the  retail  trade,  as  the  means  of  paying  balances,  and  as  bank 
ing  securities.  The  current  payments  of  business,  out  of  the 
merest  retail  trade,  are  very  seldom  made  in  coins  or  bullion. 
It  is  a  fact  well  known  in  this  country,  that  where  notes  are 
issued  in  sums  small  enough  for  the  purposes  of  the  retail  trade, 
they  invariably  supersede  the  use  of  coins,  even  in  the  retail 
business.  It  requires  very  stringent  laws  in  Pennsylvania  to 
keep  out  of  her  circulation  the  one  dollar  notes  of  the  surround 
ing  States ;  and  even  with  the  aid  of  these  they  are  but  par 
tially  kept  away :  such  is  the  indifference  to  coins,  in  a  country 
where  each  individual  has  a  legal  right  to  demand  payment  of 
every  debt  due  to  him  in  gold  or  silver.  The  precious  metals, 
therefore,  find  no  actual  preference  even  in  the  small  payments 
of  the  retail  trade.  Experience  has  shown  the  same  results, 
even  where  the  paper  thus  preferred  was  inconvertible. 

In  Great  Britain,  and  in  the  United  States,  long  'periods  of 
time  have  elapsed,  in  which  payments  were  almost  exclusively 
made  in  inconvertible  paper  currency,  or  in  other  devices  of 
the  credit  system.  This  was  the  case  in  Great  Britain  in  the 
memorable  period  between  1797  and  1822  ;  a  period  of  conti 
nental  war,  but  of  great  commercial  and  industrial  prosperity ; 
a  period  in  which  the  public  revenue  and  productive  industry 
reached  a  higher  point  than  had  ever  been  attained  before.  But 
even  since  the  resumption  of  specie  payments  in  Great  Britain, 


160       TENDENCY    TO    DISPENSE    WITH    MONEY. 

and  in  the  United  States,  the  payments  of  commerce  are,  to  a 
very  small  extent,  made  in  coins  or  bullion,  though  every  credi 
tor  can  legally  insist  upon  such  payment.  Commerce,  then,  can 
be  carried  on  without  resort  to  the  precious  metals,  in  case  of 
national  emergency ;  their  agency  is  comparatively  small  and 
special,  when  such  emergencies  do  not  exist.  In  the  city  and 
State  of  New  York,  nearly  the  entire  domestic  circulation  down 
to  a  dollar  is  of  paper ;  and  so  it  is  throughout  the  New  Eng 
land  States.  A  very  large  proportion  of  their  current  pay 
ments  is  made  in  notes  under  five  dollars ;  and  the  amount  of 
coins  required  is  only  in  change  for  sums  under  one  dollar. 
They  prefer  this  system,  and  adhere  to  it.  The  Scots  are  so 
extremely  tenacious  of  their  one  pound  notes,  that  they  have 
strenuously  resisted  repeated  efforts  of  the  British  Parliament 
to  prohibit  the  issue  of  such  notes  in  Scotland.1  And  highly  as 
the  English  authorities  now  pride  themselves  upon  the  fact  of 
permitting  the  issue  of  no  bank-notes  under  five  pounds,  it  is  a 
fact  well  known,  that  upon  one  occasion  the  Bank  of  England 
was  saved  from  suspension,  on  the  occasion  of  a  run  upon  its 
specie,  by  offering  to  the  public  one  pound  notes,  a  box  of  which 
happily  remained  in  the  bank,  the  remnant  of  former  issues.  We 
adduce  such  facts  as  these,  and  many  such  might  be  indicated, 
to  show  the  comparative  importance  of  the  precious  metals  as  a 
means  of  payment.  It  is  impossible  to  estimate  the  exact 
agency,  or  comparative  efficiency,  of  any  of  the  various  modes 
of  effecting  payments.  We  can  only  determine  their  respective 
usefulness  by  observing  their  operation  side  by  side.  We  can 
not  but  see  that,  whatever  advantages  the  precious  metals  have 
in  their  intrinsic  value,  in  their  superior  fitness  for  coinage,  in 
their  being  the  only  legal  medium  of  discharging  a  debt,  in 
every  creditor's  having  the  right  to  demand  them  in  payment, 
yet,  after  all,  they  are  employed  to  but  a  very  limited  extent, 
and  are  always  displaced  by  paper  whenever  it  is  offered,  both 
for  large  and  in  small  transactions. 

1  One  of  these  efforts  called  forth  a  witty  and  energetic  protestation  by 
Walter  Scott,  in  several  long  letters  under  the  signature  of  MalacU  Mala- 
growther. 


PREFERENCE    OF    THE    CREDIT    SYSTEM.        161 

We  repeat,  then,  that  there  is  neither  propriety,  nor  neces 
sity,  nor  logic,  in  looking  to  the  doctrine  of  the  precious  metals 
and  coinage  for  rules  or  regulations  in  regard  to  processes  of 
payment,  and  devices  of  the  credit  system,  which  are  wholly  in 
dependent  of  the  precious  metals  in  their  theory,  and  in  their 
operation.  Because  gold  and  silver,  one  or  both,  are  the  safest 
and  best  medium  for  payment  of  balances,  for  bank  securities, 
and  for  legal  tender  in  cases  where  parties  cannot  agree,  it  does 
not  follow  that  the  doctrine  and  usages  which  govern  payments 
in  the  precious  metals  should  be  the  rule  in  payments  by  the 
credit  system. 

We  may  adduce,  as  further  proof  that  the  precious  metals 
occupy  no  specially  important  rank  in  the  great  business  of  pay 
ing  debts,  that  when  the  demand  for  means  to  pay  debts  is  so 
urgent  that  the  rate  of  interest  rises  from  the  half  of  one  to  one, 
two  or  three  per  cent,  per  month,  the  demand  in  such  cases  is 
never  for  specie  or  coins,  but  merely  for  such  funds  as  are 
usually  employed  in  payments.  Coins  or  bullion  do  not  fluc 
tuate  in  value,  with  the  rate  of  interest;  when  interest  rises 
one,  two  or  three  hundred  per  cent.,  coins  may  not  increase  in 
value  one  per  cent.  A  great  demand  for  the  means  of  paying 
debts  does  not  imply  any  increased  demand  for  coins  or  bullion. 
When  the  pressure  for  money  is  greatest,  and  interest  at  the 
highest  rate,  gold  or  silver  coins  command  no  higher  interest 
than  a  credit  in  bank.  A  credit  on  the  books  of  the  Bank  of 
Venice,  which  was  not  convertible  into  specie,  but  only  trans 
ferable  in  payment  of  debts,  always  stood  at  a  high  premium 
over  current  coins.  It  is  evident,  then,  that  the  partiality 
entertained  for  the  precious  metals  is  not  strong  enough  to  in 
crease  the  price  or  the  demand,  in  times  of  pressure  or  scarcity, 
any  more  than  when  money  is  plenty,  and  interest  low.  What 
is  needed,  at  such  times,  is  not  gold  nor  silver,  for  upon  such 
occasions  they  are  specially  inconvenient,  but  simply  funds 
which  will  pay  debts,  whether  bank-notes  or  bank  credits.  The 
most  urgent  necessity  to  which  the  man  of  business  is  subject, 
is  that  of  paying  his  debts  with  perfect  punctuality ;  his  credit 
depends  upon  this.  Yet,  in  his  most  pressing  wants  for  money, 
11 


162  THE    DOCTRINE    OF    MONEY 

it  never  occurs  to  him  that  coins  are  any  more  desirable  than 
anything  else  that  will  acquit  him  of  his  obligations. 

It  would  seem  idle  to  maintain  this  point  further,  by  argu 
ment  or  illustration,  if  men  of  high  position  and  acute  minds 
had  not  even  recently  yielded  to  the  fallacy,  that  substitutes  for 
money  should  be  regulated  so  as  to  operate  like  a  currency 
wholly  of  gold  or  silver.  Upon  this  idea,  chiefly,  was  Sir 
Robert  Peel's  bill  of  1844,  to  modify  the  Bank  of  England, 
founded.  The  bank  was  allowed,  by  this  bill,  to  issue  notes,  to 
a  certain  specified  amount,  on  the  security  of  the  debt  due  by 
the  government  to  the  bank.  Beyond  that  sum  no  further 
issues  were  to  be  made  but  upon  gold  actually  in  the  bank ;  the 
avowed  object  being  to  make  the  notes  fluctuate  precisely  as  a 
gold  currency  wrould  fluctuate.  The  error  involved  in  this  mea 
sure,  and  the  deceptive  reasoning  upon  which  it  was  based,  was 
strongly  urged  at  the  time  :  experience  has  equally  condemned 
it  since ;  and  it  only  stands  a  monument  of  the  difficulty  a  gov 
ernment  finds  in  retracing  a  false  step. 

It  will  be  some  gain  if  the  public  learn  from  experiment,  that 
the  only  connexion  wrhich  the  gold  in  the  Bank  of  England  has 
with  its  current  operations  is  as  a  security  to  the  holder  of  its 
notes,  and  to  its  depositors.  The  immense  amount  of  payments 
effected  by  the  customers  of  the  bank,  through  its  agency,  are 
in  no  way  dependent  on  the  gold  in  its  vaults  for  their  efficacy. 
The  government  may  limit  the  business  of  the  bank  by  refer 
ence  to  the  quantity  of  gold  on  hand,  if  the  public  interest 
demands  it ;  but  it  should  not  propound,  as  a  reason  for  such 
limitation,  that  the  movements  in  the  deposits  and  notes  of  a 
bank  should  correspond  with  the  fluctuations  of  a  currency 
wholly  metallic.  This  is  running  the  cart  against  the  locomo 
tive,  the  "  ship  of  the  desert"  against  the  steamer  of  the  ocean. 
A  greater  amount  of  payments  are  made,  in  the  Bank  of  Eng 
land,  for  the  benefit  of  its  customers  in  one  week,  without 
touching  a  penny  of  its  coin,  than  could  be  effected  by  that 
coin,  in  its  regular  movements,  in  a  whole  year.  The  bank,  what 
ever  its  demerits,  or  whatever  reforms  it  may  need,  as  an  instru 
ment  for  accomplishing  the  payments  of  commerce,  is  just  as 


IS    NOT    THE    LAW    OP    CREDIT.  163 

much  more  effective  than  the  coin  in  its  vaults,  as  a  locomotive 
with  its  freight  train  is  superior  to  a  man  with  a  wheelbarrow. 
When  it  becomes  expedient  for  a  steamer  at  sea  to  tack  and 
take  the  same  zig-zag  course  which  a  sailing  vessel  is  compelled 
to  take,  then  it  may  be  wise  to  regulate  the  movements  of  the 
credit  system  by  those  of  coins  and  bullion. 

The  influence  of  a  great  and  honest  statesman  was  sufficient 
to  carry,  against  much  opposition,  a  measure  destined  to  be 
called  the  greatest  mistake  of  his  useful  life.  We  shall  not 
enter  into  the  subject  at  large  here :  the  whole  substance  of  the 
positions  taken  in  this  volume  are  opposed  to  the  principles  pro 
pounded  as  grounds  for  the  act  of  1844. l 

The  advocate  of  the  act  of  1844  regards  the  whole  subject  of 
money  and  credit  from  a  wrong  point  of  view.  The  real  subject 
is  commerce,  and  the  real  question  is,  how  the  payments  of 

1  We  cannot  easily  persuade  ourselves  that  this  act  is  really  a  product 
of  Sir  Robert  Peel's  mind.  We  rather  incline  to  give  the  credit  to  Col. 
Torrens,  who  has  defended  it  with  ability,  and  evidently  regarded  it  with 
the  kind  of  favor  which  a  man  bestows  upon  his  own  progeny.  Col.  Tor 
rens  speaks  thus,  in  a  pamphlet  published  in  1848  :  —  "  These  provisions 
of  the  act  of  1844  were  framed  in  conformity  with  the  following  princi 
ples,"  &c.  Again:  "Such  being  the  principles  upon  which  the  act  was 
founded,  it  became  incumbent  on  those  who  were  concerned  in  framing  it," 
&c.  Further :  "  Upon  these  grounds  the  framers  of  the  act  assumed,"  &c. 
It  will  be  observed  he  does  not  ascribe  the  act,  or  its  principles,  to  Sir 
Robert  Peel ;  he  fully  approved  the  measure,  and  assumed  to  know  the 
principles  and  views  of  the  framers,  without  any  intimation  that  they  were 
those  of  the  distinguished  statesman  to  whom  they  are  usually  ascribed. 
From  such  modes  of  expression,  when  taken  in  connexion  with  the  fact, 
that  the  act  is  almost  universally  ascribed  to  Peel,  we  can  only  draw  the 
inference  that  Col.  Torrens  was  either  the  framer,  or  one  of  the  framers  of 
that  act.  It  may  be,  after  all,  that  Lord  Overstone  is  entitled  to  be  re 
garded  as  the  chief  adviser  of  Sir  Robert  Peel,  in  reference  to  this  mea 
sure.  We  confess  that  we  should  look  upon  this  as  extremely  improbable- 
if  there  were  no  evidence  to  that  effect.  Surely,  his  great  practical  know 
ledge,  and  well-known  discrimination,  should  have  protected  him  from  so 
serious  an  error,  however  congenial  it  may  be  to  a  mind  like  that  of  Col. 
Torrens.  Whoever  may  be  the  real  author  of  this  false  legislation,  we 
trust  he  may  live  to  see  that  even  great  names  cannot  perpetuate  great 
mistakes. 


164  THE    BANK    OF    ENGLAND. 

commerce   can   be   most   effectively   and   economically  accom 
plished  ?     This  question,  without  reference  to  its  connexion  with 
the  Bank  of  England,  had  long  and  constantly  been  the  subject 
of  study  upon  the  part  of  men  of  business  and  of  finance.     They 
had,  long  before  the  bank  was  in  existence,  determined  that  the 
precious  metals  were  to  be  wholly  dispensed  with  in  payments, 
when  the  payments  could  be  as  well  effected  without  them.     In 
this  they  had  succeeded  to  such  an  extent,  even  before  the  days 
of  banks  of  circulation,  that  by  far  the  largest  share  of  the  pay 
ments  were  made  without  any  aid  from  coins.1     The  establish 
ment  of  the  Bank  of  England  did  not  change  the  nature  of  the 
question,  which  was  still  how  to  economize  the  use  of  coins  in 
the  payments  of  trade.     This  bank,  whatever  the  faults  of  its 
constitution,  became  one  of  the  most  efficient  agents  of  com 
merce  ever  established ;  only  second,  perhaps,  to  the  Bank  of 
Venice :  and  to  the  praise  of  English  commercial  integrity  be  it 
said,  that  no  banking  institution  was  ever,  for  such  a  length  of 
time,  more  honestly  and  wisely  managed.    Its  proper  government 
has  involved  more  real  difficulties  than  any  other  bank  ever 
encountered,  and  it  has  triumphed  over  all.     Its  chief  object 
and  business  has  been  to  effect  payments  without  the  use  of 
coins.     It  has  enabled  its  customers  to  make  their  payments,  to 
the  amount  of  many  millions  sterling  weekly,  without  the  use 
of  either  coins  or  bullion.     As  a  security  for  these  customers, 
and  a  convenience,  the  bank  agreed  to  pay  all  its  own  debts 
upon  demand  in  coin ;  but  this  it  did  upon  the  presumption  that 
the  wants  for  coin  would  not  exceed  its  ability  to  pay,  as  in 
ordinary  times  they  do  not.     Unless  some  extraordinary  emer 
gency  occurred  to  create  a  special  demand  for  specie,  the  busi 
ness  of  the  bank  was   not   conducted  with  any  reference  to 
coins;  and  proceeded  as  well,  and  in  the  same  way,  with  five 
millions  in  coins   in  the  bank,  as  with   fifteen   millions.     The 
current  payments   at  the  bank,   among  men  of  business,  are 
not   in   the   slightest   degree   facilitated   by   the    coins   in   its 
vaults.     When,  from  any  unusual  circumstance,  such  a  demand 

1  See  Chapter  on  "  FAIRS,"  infra. 


THE    BANK    OF    ENGLAND.  165 

upon  the  bank  for  coins  occurs  as  makes  it  necessary  to  cur 
tail  its  accommodations,  and  thus  diminish  the  amount  of  itfr 
debts  payable  on  demand ;  this,  though  it  may  prove  a  very  great 
injury  and  inconvenience  to  the  customers  of  the  bank,  cannot 
alter  the  nature  of  their  business,  nor  lessen  their  need  of  the 
usual  facilities :  the  curtailment  of  which,  by  the  bank,  is  a  mea 
sure  of  defence  as  between  the  bank  and  the  public,  by  which 
the  customers  of  the  bank  of  course  suffer.  They  still  demand 
the  same  accommodation  from  the  bank  —  their  business  still 
requires  it :  the  flow  of  coin  from  the  bank  is  of  no  conse 
quence  to  them,  if  they  can  keep  up  the  amount  of  their  depo 
sits  for  current  payments.  An  extraordinary  demand  for  coins 
would  be  of  no  more  importance  to  them  than  an  unusual 
demand  for  coffee  or  cotton,  unless  it  had  the  effect  of  diminish 
ing  their  accommodations  at  bank.  They  would  not  admit, 
for  a  moment,  the  doctrine  that  their  economical  and  effi 
cient  mode  of  adjusting  mutual  demands  —  the  paying  their 
debts  by  the  use  of  their  credits  —  should  depend  upon  short 
crops  at  home,  or  any  special  demand  for  specie  abroad,  either 
for  rebellion  in  China,  wars  in  the  East  Indies,  or  commercial 
revulsions  anywhere. 

They  would  regard  "  the  natural  law  of  equilibrium,  by  which 
the  precious  metals  are  distributed  throughout  the  countries  of 
the  world,"  l  as  an  intangible  phantom.  For  men  of  commerce 
know  that  the  amount  of  coined  money  employed  by  a  people 
depends  mainly  upon  their  mutual  confidence,  and  the  extent  to 
which  they  employ  the  most  approved  devices  of  the  credit  sys 
tem.  A  high  state  of  commercial  integrity  will  dispense  with  a 
large  proportion  of  the  coin  which  might  be  required  without  it. 
The  merchants  of  a  country  in  which  commercial  honor  is  of  a 
high  grade,  and  in  which  mutual  credit  and  confidence  corre 
spond,  would  be  very  slow  to  admit  that  their  modes  of  pay 
ment —  that  of  applying  credits  to  the  payment  of  debts  — 
should  fluctuate  in  amount,  just  as  the  circulation  of  coins  may 
happen  to  vary.  They  would  regard  as  purely  visionary  the 

1  Col.  Torrens. 


166  RESTRICTED    AGENCY    OF    MONEY. 

idea  of  any  ebb  and  flow  of  gold,  regular  or  irregular,  .by  which 
their  business  was  to  be  limited  or  regulated.  It  is  the 
accidental  circumstance,  that  the  bank  pays  its  debts  in  gold, 
which  makes  it  necessary  for  them  to  watch  the  demand  for 
gold,  and  guard  against  the  contractions  of  the  bank.  They  do 
not  regulate  their  business  by  the  movement  of  gold,  but  pro 
tect  themselves  against  the  effects  of  some  of  its  movements,  as 
they  would  against  any  other  unfavorable  incident. 

If  the  question  were  merely  as  to  the  mode  of  securing  the 
convertibility  of  bank-notes,  we  should,  at  this  stage  of  our  in 
quiry,  have  no  remarks  to  make  upon  the  act  of  1844;  but 
when  the  avowed  object  is  to  produce  a  fluctuation  in  the  quan 
tity  or  amount  of  bank-notes,  similar  to  what  would  take  place 
if  the  coin  or  bullion  were  employed  in  place  of  the  notes,  we 
see  that  the  whole  proceeding  is  founded  on  a  misconcep 
tion  of  the  separate  functions  of  money,  and  of  the  credit  sys 
tem.  We  have  already  stated  that  the  chief  use  of  money  is  in 
the  small  operations  of  the  retail  trade,  in  the  final  distribution 
of  the  products  of  industry,  and,  with  the  further  aid  of  bullion, 
in  the  payment  of  balances  in  the  foreign  trade  of  nations,  or 
balances  between  different  districts  of  the  same  country.  More 
than  ninety-five  per  cent,  of  the  larger  operations,  or  debts  of 
commerce,  are  settled  and  adjusted  without  resort  to  the  pre 
cious  metals,  which  are  only  used  where  the  modes  of  the 
credit  system  do  not  apply.  If  France  exports  to  the  amount 
of  a  hundred  millions  to  England,  and  the  latter  to  the  amount 
of  ninety-five  millions  to  France,  the  indebtedness  between  them, 
to  the  amount  of  ninety-five  millions  on  each  part,  is  adjusted 
by  bills  of  exchange,  and  other  devices  of  credit.  The  precious 
metals  are  called  in  to  pay  the  balance  of  five  millions.  There 
is,  indeed,  no  resemblance  between  this  use  of  the  precious 
metals  and  the  processes  of  credit  by  which  this  vast  indebted 
ness  of  one  hundred  and  ninety-five  millions  would  be  fully  paid 
and  settled.  On  the  contrary,  the  five  millions'  worth  of  gold 
and  silver  employed  to  cover  this  remaining  debt  would  be  merely 
another  commodity  exported  to  bring  the  transactions  between 
the  nations  to  a  balance. 


CREDIT    AND    MONEY  —  DISTINCT    SYSTEMS.      167 

Every  medium  of  exchange,  every  commercial  equivalent,  and 
every  mode  of  payment,  is  strictly  subordinate  to  the  great  pur 
poses  of  commerce.  Each  must  be  regarded  separately,  in 
reference  to  its  mode  of  subserving  the  ends  of  commerce,  its 
special  adaptation,  and  the  means  of  increasing  its  efficiency. 
There  is  no  more  reason  in  mingling  book-keeping  and  coinage, 
than  in  mixing  together  ships  and  warehouses  :  all  these  things 
are  mere  agencies  of  commerce.  Each  has  a  special  purpose  to 
subserve,  and  its  use  should  be  studied  with  reference  to  that 
purpose.  Now,  the  mode  in  which  coins  and  bullion  are  em 
ployed,  and  the  extent  to  which  they  are  used  in  the  current 
payments  of  commerce,  foreign  and  domestic,  is  easily  traced 
and  known  :  in  considering  their  uses,  powers  and  efficiency,  we 
should  not  lose  sight  of  the  facts  which  thus  belong  to  their  use 
and  history.  As  but  a  small  proportion  of  the  great  payments 
of  trade  are  made  in  the  precious  metals,  we  must  constantly 
distinguish  between  what  is  done  with,  and  what  is  done  without 
them,  and  regard  these  distinct  methods  with  equal  attention. 
These  modes  are  so  totally  different,  that  a  knowledge  of  the 
use  of  coins  or  bullion  is  very  far  from  making  an  adept  in  the 
processes  of  the  credit  system.  The  latter  are  not  derived  from 
the  former,  and  must  be  examined  and  studied  upon  different 
facts,  and  circumstances  as  different.  When  coins  or  bullion 
are  employed,  they  are  used  as  an  equivalent  for  the  merchan 
dise  or  articles  for  which  they  are  given ;  that  is,  one  article  of 
value  is  given  for  another,  and  the  transaction  is  ended.  But 
the  payments  of  the  credit  system  are  effected  by  devices  com 
plicated  with  various  securities,  such  as  bills  of  exchange,  pro 
missory  notes,  books  of  account,  bank-checks,  and  many  other 
agencies.  By  this  credit  system,  the  goods  sold  pay  for  the 
goods  purchased  —  all  that  intervenes  being  the  paper  securi 
ties  which  all  the  buyers  and  sellers  hold  as  evidence  of  their 
claims  and  transactions.  The  only  link  between  the  money  sys 
tem  and  the  credit  system  is  the  money  of  account,  which  is  .a 
universal  accompaniment  of  the  money  system,  but  indispens 
able  to  the  use  of  the  securities  and  other  devices  of  the  credit 
system. 


168  IT    IS    A    QUESTION    OF    ECONOMY. 

The  credit  system  is  an  incalculable  saving  in  the  commerce 
of  the  world,  because  it  dispenses  with  the  necessity  of  employ 
ing  immense  sums  in  the  precious  metals.  But  it  does  not 
affect  to  dispense  with  them  altogether ;  it  leaves  all  balances 
to  be  paid  in  money.  It  makes  large  demands  upon  the  pre 
cious  metals,  to  be  held  as  securities  for  contingent  or  future 
payments.  The  credit  system  is  one  thing  —  the  money  system 
is  another.  Both  are  agencies  of  commerce ;  they  operate  dif 
ferently,  and  must  be  studied  according  to  their  respective 
modes  of  operation. 

The  narrow  channel  of  usefulness  in  wrhich  coins  can  be  em 
ployed,  now  well  understood,  may  be  enlarged  by  discoveries 
and  efforts  yet  to  be  made ;  interest  will  ever  be  a  sufficient 
incentive  to  such  progress.  As  matters  now  stand,  it  is  more 
in  the  natural  order  of  things  to  consider  how  to  dispense  with 
the  precious  metals  advantageously,  in  effecting  the  operations 
of  commerce,  than  how  to  employ  them.  Let  us  suppose  the 
subject  presented  in  these  two  points  of  view  to  two  large  con 
sumers  of  each  other's  products.  If  the  question  between  them 
be  how  they  can  effect  an  exchange  of  their  products  with  the 
most  economy  and  advantage,  they  may  devise  various  modes  of 
doing  this,  without  using  money,  which  is  the  most  expensive  of 
all  agents.  They  may,  for  instance,  simply  charge  each  other 
with  the  amount  of  the  respective  purchases  as  they  occur.  The 
accounts  thus  kept  may  be  compared  and  balanced  once  a  month, 
or  once  a  year,  and  the  amount  resulting  either  way  be  carried 
to  a  new  account,  or  be  paid  in  gold  or  silver.  If  the  question, 
however  considered  between  these  parties,  be  strictly  how  they 
can  best  employ  money  or  coins  in  their  dealings,  it  will  be 
merely  whether  the  cash  shall  be  paid  upon  each  transaction, 
or  only  at  agreed  intervals.  They  will  not  arrive  at  the  economy 
of  doing  their  business  without  gold  or  silver,  because  they  will 
not  be  looking  for  it. 

The  necessity  of  properly  regulating  and  restraining  the  issue 
of  bank  paper  cannot  be  controverted ;  the  security  required, 
whether  gold,  or  silver,  or  something  else,  should  be  of  a  nature 
to  inspire  and  secure  confidence.  If  gold  or  silver  be  the  secu- 


CONTRACTION  OF  CURRENCY.         169 

rity  required,  so  be  it.  But  it  does  not  follow  that  the  paper 
must  fluctuate  in  amount  as  the  precious  metals  would  do,  if 
they  were  the  sole  medium  of  payment.  Gold  and  silver  being 
themselves  commodities  of  trade,  for  which  there  are  various 
specific  uses  and  demands  totally  apart  from  their  uses  as  a  me 
dium  of  commerce,  the  rule  which  would  withhold  bank  issues, 
because  the  precious  metals  were  in  demand,  must  work  directly 
against  the  interests  of  commerce.  It  would  be  like  the  conduct 
of  a  commander  in  the  field,  who  should  dismiss  his  auxiliaries 
in  the  same  proportion  he  was  losing  his  own  regular  forces.  It 
may  be  necessary  for  the  banks  at  times,  under  the  present  sys 
tems  of  payment,  to  reduce  the  issues  of  their  paper  when  specie 
is  in  demand ;  but  this  is  a  measure  of  safety  for  the  banks,  and 
it  is  only  as  a  measure  of  safety  that  it  is  enforced.  The  banks 
can  give  no  reason  why  they  should  reduce  their  circulation, 
when  the  precious  metals  are  being  exported,  but  that  their 
safety  requires  it.  If  the  banks  were  able  to  protect  their  circu 
lation  under  such  circumstances,  it  would  accord  with  their  own 
and  the  public  interests  to  enlarge  their  circulation  when  money 
is  thus  withdrawn.  What,  in  peculiar  circumstances,  may  be 
prudent  or  expedient,  should  not  be  converted  into  a  law  or  rule 
of  public  economy,  or  a  principle  of  banking. 

The  bank  of  England  may  contract  its  issues  when  gold  is  ex 
ported,  or  it  may  not,  according  to  the  circumstances  of  the 
case.  The  discretion  of  its  directors,  their  knowledge  of  finan 
cial  operations  and  the  course  of  trade,  must  govern  their  deci 
sion.  The  bank  might  be  compelled,  from  motives  of  caution 
and  safety,  to  restrict  its  issues,  in  the  face  of  a  demand  for 
gold  from  some  distant  part  of  the  world ;  but  a  demand  for 
gold  on  the  other  side  of  the  globe  is  in  itself  no  very  good  rea 
son  why  British  merchants  and  manufacturers  should  be  denied 
their  usual  bank  facilities.  The  bank,  in  the  circumstances, 
may  not  be  able  to  afford  them ;  but  that  arises  from  the  consti 
tution  of  the  bank,  and  not  from  any  condition  of  British  trade, 
which  would  make  the  withholding  of  the  usual  facilities  proper. 
The  act  of  1844  converts  the  caution  of  the  Bank  of  England 
into  a  law  of  trade.  If  the  people  of  France  at  any  time  want 


170       THE    DEVICES    OF    CREDIT    SUBSTITUTES 

more  gold  in  their  domestic  trade,  it  forms  no  sound  reason  why 
the  people  of  Great  Britain  should,  on  that  account,  make  less 
use  of  credit  in  their  domestic  trade. 

It  cannot  be  said  there  is  even  any  such  analogy  or  con 
nexion  between  the  mode  of  payment  by  the  use  of  the  precious 
metals  and  the  various  modes  and  devices  of  payment  employed 
in  the  credit  system,  that  one  should  be  a  law  or  rule  for  the 
other.  When  gold  is  rapidly  leaving  England,  should  men  of 
business  then  cease  proportionably  to  employ  their  books  of 
account  —  should  bills  of  exchange,  as  a  means  of  adjustment, 
be  less  resorted  to  ?  The  contrary  of  this  is,  in  fact,  the  sound 
rule,  and  the  one  to  which  the  intelligence  of  the  people,  and 
the  necessity  of  the  case,  alike  lead.  When  the  quantity  of  coin 
diminishes,  the  resort  to  other  devices  of  payment  increases. 
During  the  time  of  the  suspension  in  England,  the  payments  of 
trade  were  not  restricted,  nor  diminished,  in  proportion  to  the 
quantity  of  specie  remaining  in  the  country.  The  people  trans 
acted  their  business,  and  made  their  payments,  not  by  reference 
to  the  diminishing  stock  of  the  precious  metals,  but  according  to 
the  lawrs  of  mutual  trade.  Instead  of  allowing  their  business  to 
sink  with  their  stock  of  gold,  they  gave  it  a  wonderful  develop 
ment,  both  in  volume  and  value. 

The  history  of  commerce  shows,  as  we  have  had  frequent 
occasion  to  remark,  that  various  devices  of  credit  and  payment 
are  so  many  plans  to  avoid  the  necessity  of  employing  the  pre 
cious  metals.  These  devices  have  been  numerous  and  efficient, 
in  proportion  to  the  progress  of  trade,  and  measure  that  pro 
gress  with  considerable  accuracy.  They  have  been,  in  fact, 
devices  of  necessity :  the  precious  metals  having  been  made  to 
perform  all  that  was  possible,  resort  was  had  to  other  means  of 
payment  to  carry  on  that  trade,  which  would  not  otherwise  have 
had  any  existence.  Considering  the  partiality  which  has  always 
existed  for  gold  and  silver,  they  could  never  have  been  so 
largely  dispensed  with,  without  very  substantial  reasons.  The 
plan  of  returning  wholly  to  the  use  of  gold  and  silver,  at  the 
present  day,  for  all  payments,  is  therefore  plainly  impossible  on 
other  conditions  than  reducing  commerce  to  the  extent  to  which 


FOR    THE    PRECIOUS    METALS.  171 

it  is  now  carried  on  by  means  of  coins  and  bullion.  It  must  be 
noted,  that  these  are  not  idle ;  they  are  now  used  constantly,  to 
the  extent  of  their  capability.  The  quantity  shut  up  in  banks — 
a  small  amount,  in  proportion  to  the  whole  —  is  all  that  could  be 
added  to  the  mass  in  circulation.  It  will  be  seen,  by  a  little 
consideration  of  what  is  now  done  in  trade  by  metallic  money, 
and  what  by  credit  and  substitutes  for  money,  that  a  return  to 
the  metallic  medium  would  necessarily  involve  a  reduction  of 
commerce  to  less  than  a  thousandth  part  of  its  present  import 
ance.  The  various  modes  of  effecting  payments  without  hard 
money  are  the  result  of  more  than  three  centuries  of  effort  and 
experience.  It  betrays,  then,  small  acquaintance  with  the  his 
tory  of  commerce,  to  propose  an  exclusive  use  of  the  precious 
metals  in  all  transactions  of  trade. 

We  have  already  adverted  to  some  of  the  evils  and  vexations 
of  a  hard-money  currency ;  we  might  greatly  enlarge  upon  that 
topic.  It  is  true  that  many  of  the  mischiefs  which  inflicted  so 
much  injury,  caused  so  much  distress,  and  drew  forth  such  loud 
complaints,  were  the  result  of  abuses,  as  in  fact  is  the  case  now 
with  the  abuses  of  credit.  But  there  are  objections  to  an  exclu 
sive  currency  of  the  precious  metals,  apart  from  any  abuse  suffi 
cient  to  warrant  all  the  efforts  of  the  last  three  or  four  centuries 
to  introduce  another  system  of  payment. 

One  of  these  is  the  expense  of  providing  a  medium  of  so  great 
intrinsic  value.  As  the  cost  of  the  medium  to  the  transactions 
effected  in  a  year,  so  is  the  annual  charge.  We  have  now,  in 
the  United  States,  about  $250,000,000  in  specie,  which  we 
retain  at  a  cost  of  $15,000,000  yearly,  besides  the  charge  for 
coinage.  How  much  this  stock  of  the  precious  metals  would 
have  to  be  increased,  to  perform  the  business  of  this  country, 
would.be  estimated  very  differently.  It  would  require,  probably, 
all  the  gold  and  silver  now  in  use  as  money  in  the  world,  to 
make  the  current  payments  of  Great  Britain  and  the  United 
States.  But  the  cost  of  handling,  transporting,  counting  and 
guarding  such  immense  quantities  of  treasure  is  beyond  all  cal 
culation.  The  cost  of  maintaining  such  a  stock  of  hard  money 
would  be  a  tax  which  no  modern  people  would  endure  for  a  sin- 


172  POSSESSION    OF    PRECIOUS    METALS 

gle  year.  No  effort  that  the  people  of  the  United  States  could 
be  brought  to  make  would  double  our  present  stock.  It  would 
be  the  purchase  of  a  dead  or  unproductive  stock  of  250,000,000. 
Who  would  be  the  holders  of  this  unproductive  article  ?  If  the 
people  had  desired  any  great  increase,  they  would  have  it  now; 
they  are  exporting  gold  by  the  million  weekly.  The  increased 
quantity  does  not  enter  the  channels  of  circulation,  because  the 
people  do  not  desire  it.  They  can,  at  pleasure,  change  notes  for 
coins,  but  they  do  not ;  they  can  exact  payment  of  every  debt 
due  to  them  in  coins,  but  they  do  not.  Whoever  supposes  this 
indisposition  to  hold  coin  in  place  of  notes  or  credit,  can  be  over 
come  by  legislation  or  essay  writing,  is  greatly  in  error.  The 
resort  to  credit,  as  a  substitute  for  money,  has  steadily  increased 
for  more  than  a  century.  This  progress  is  now  more  rapid  than 
ever.  It  is  not  measured  merely  by  the  number  of  banks  and 
bankers,  but  by  the  manner  in  which  business  is  transacted  with 
them.  There  is  every  indication  that  this  progress  is  yet  to  be 
greater  than  heretofore,  and  that  the  time  will  never  again  come 
when  a  return  to  a  currency  of  the  precious  metals  will  be  among 
the  possible  things.  The  depreciation  of  these  metals  has  been 
so  great  since  the  discovery  of  America,  that  one  of  the  difficul 
ties  has  increased  many  fold.  It  is  little  thought  of  now,  but 
the  time  was  when  travellers  carried  coin  for  their  expenses, 
and  families  kept  it  in  their  houses  for  the  same  purpose,  that 
the  terror  endured  from  fears  of  robbery  was  fully  justified  by 
the  danger  in  which  every  family  lived, ,  and  every  traveller 
moved.  Piracy  and  robbery,  with  accompanying  murders,  for 
the  sake  of  hard  money,  were  prevalent  throughout  Europe,  and 
upon  all  seas. 

Now  that  the  custody  of  large  sums  of  the  precious  metals  is 
almost  exclusively  committed  to  banks  and  bankers,  the  danger 
and  the  risk  of  keeping  and  transporting  large  sums  in  the 
hands  of  individuals  is  forgotten,  or  not  appreciated.  If  such 
custody  were  resumed  by  merchants  and  capitalists,  robbers  and 
pirates  would  soon  resume  their  vocation.  Gold  and  silver  have 
no  ear-marks  ;  there  is  no  valuable  possession  so  easily  secreted, 
and  so  difficult  to  follow. 


DANGEROUS    TO    INDIVIDUALS.  173 

No  evil,  however,  of  the  days  of  hard  money  was  more 
severely  felt,  none  was  more  fiercely  denounced,  than  the  ter 
rible  grip  of  usurers.  The  power  of  the  money-kings  of  those 
times  was  far  beyond  any  modern  experience  in  that  line. 
Year  after  year,  a  storm  of  indignation  burst  forth  upon  the 
heads  of  money-lenders ;  the  clergy  preached,  and  wrote,  and 
denounced  the  extortioners ;  and  nothing  kept  the  Jew  from  the 
wrath  of  the  laity,  but  the  strong  arm  of  kings  and  magistrates, 
who  plundered  those  who  plundered  the  people ;  thus  transfer 
ring  the  odium  to  the  Jew,  whilst  the  prey  came  to  their  pockets. 


CHAPTER   VI. 

BANKS    OF    DEPOSIT. 
8  1.     Bank  of  Amsterdam. 

BANKS  of  deposit,  of  which  that  of  Amsterdam  was  the  first, 
seem  to  occupy  an  intermediate  position  between  payment  in 
coins  or  bullion,  and  payment  by  the  methods  of  the  credit  sys 
tem.  ,The  difficulties  encountered  in  the  use  of  coins  became  so 
great,  as  to  be  deemed  very  serious  grievances.  There  was  con 
tinual  hazard  in  keeping  and  transporting  coin,  on  account  of 
robbers,  pirates,  dishonest  agents,  counterfeiting,  and  the  nu 
merous  ways  of  abstracting  from  coins  a  portion  of  their  value 
by  plugging,  gutting  and  sweating,  besides  the  gradual  wear, 
which  made  it  impossible  for  many  to  protect  themselves  from 
loss  and  risk.  These,  and  similar  vexations  attending  the  exclu 
sive  use  of  coins  in  payment,  were  so  much  felt  as  to  produce 
great  and  wide-spread  complaint  throughout  all  Europe,  during 
the  sixteenth,  seventeenth  and  eighteenth  centuries.  It  was  felt 
that  some  remedy  was  indispensable.  The  history  of  commerce 
furnishes  an  account  of  many  of  the  modes  adopted  to  escape 
these  inconveniences.  Some  of  these  will  be  considered  here 
after,  as  falling  under  the  head  of  the  credit  system.  The  func 
tions  of  the  deposit  banks  may  be  regarded  as  partaking  some 
what  of  that  character;  but  as  the  payments  made  by  them 
were,  in  fact,  virtually  a  mere  transfer  of  the  ownership  of  cer 
tain  quantities  of  the  precious  metals,  they  belong  rather  to  the 
class  of  payments  in  money.  It  is  true,  the  parties  paying  and 
receiving  this  title  to  money  do  not  verify  the  fact  of  the  money 
being  in  the  bank.  It  was  believed  to  be  there ;  and,  so  long 
as  that  belief  continued,  the  payments  could  proceed.  These 

(174) 


THE    BANK    OF    AMSTERDAM.  175 

payments  consisted  in  transferring  a  title  to  so  much  money  as 
purported  to  be  paid ;  the  money  remained  untouched,  and  un 
seen.  This  change  of  ownership  by  transfer  of  title  might  have 
been  made  available  for  a  very  rapid  mode  of  payment ;  but  the 
whole  proceeding  was  hedged  by  so  many  ceremonies,  checks 
and  securities,  that  the  deposit  banks  were  never  as  available  as 
they  should  and  might  have  been.  The  regulation,  that  the 
same  sum  could  not,  unless  in  very  special  cases,  be  transferred 
twice  in  the  same  day,  seems  absurd  to  merchants  and  bankers 
of  the  present  time.  It  doubtless  added  to  the  treasures  of  the 
banks,  for  it  must  have  required  several  times  as  much  more 
money  to  make  the  required  payments  in  bank,  at  the  rate  of 
one  payment  for  each  amount  in  a  day,  than  if  payments  could 
have  been  made  at  pleasure. 

The  Bank  of  Amsterdam  was  established  in  January,  1609, 
under  the  guaranty  of  the  city,  and  the  government  of  its  magis 
trates.  The  avowed  object  was  to  afford  some  relief  against  the 
intolerable  nuisance  of  worn  and  defaced  coins,  which  flowed 
into  a  great  commercial  mart  like  Amsterdam  from  all  the 
world.  The  currency  made  up  of  these  coins  had  long  been  at 
a  discount  of  eight  to  ten  per  cent. ;  and  bills  of  exchange,  pay 
able  in  this  currency,  were  of  course  at  a  like  discount.  The 
leading  measure  upon  which  it  was  founded,  and  by  virtue  of 
which  it  had  a  rapid  rise  and  growth,  was  that  all  bills  of  ex 
change,  for  sums  over  600  florins,  were  payable  only  at  the 
bank.  In  a  city  where  so  many  payments  were  concentrated, 
this  regulation  drew  daily  vast  sums  to  its  vaults.  Every  per 
son  who  had  bills  to  pay  for  himself,  or  others,  was  obliged  to 
open  at  once  an  account  in  the  bank,  by  depositing  the  amount 
of  coins  or  bullion  needful  to  meet  his  payments.  These  depo 
sits  were  scrutinized,  tested,  valued,  and  the  proceeds  carried  to 
the  credit  of  the  depositor,  less  five  per  cent.,  besides  a  charge 
of  ten  florins  for  opening  the  first  account. 

As  this  bank  money  subsequently  bore  a  premium,  the  deduc 
tion  of  five  per  cent,  was  not  a  loss.  The  depositor  having 
received  his  credit  upon  the  books  of  the  bank,  was  prepared  to 
transfer  the  whole,  or  a  part,  in  payment  of  bills  of  exchange, 


176  BANKS    OF    DEPOSIT. 

or  any  other  debt.  This  policy  rapidly  absorbed  the  vast  sum 
required  to  make  the  daily  payments  of  the  city.  And  as  no 
person  was  permitted  to  transfer  a  deposit  or  sum  on  the  day  it 
was  received,  a  much  larger  sum  was  required  to  eifect  those 
payments,  than  if  the  depositors  had  been  allowed  to  transfer 
forthwith.  The  coins  and  bullion  thus  deposited  were  not  reclaim- 
able,  but,  according  to  the  theory  of  the  bank,  were  locked  up 
for  ever.  Deposits  were  safe,  in  the  hands  of  all  holders,  from 
legal  seizure  and  attachment.  The  bank  received  money,  also, 
for  safe  keeping,  which  was  returnable  on  demand,  the  deposi 
tor  paying  a  small  charge  for  the  service.  Although  it  paid 
no  interest  for  deposits  of  any  kind,  it  became  thus  the  depo 
sitory  of  many  people  and  institutions,  who  were  afraid  to  keep 
money  in  their  own  possession. 

Though  the  credit  given  to  those  opening  accounts  was  less, 
by  five  per  cent.,  than  the  actual  deposit,  yet  this  mode  of  pay 
ment  was  deemed  so  much  more  eligible  than  counting,  handling, 
testing  and  scrutinizing  coins  and  bullion,  the  risk  was  deemed 
so  much  less,  and  the  facility  so  much  greater,  that  the  bank 
deposits  attained  a  permanently  higher  value  than  the  ordinary 
currency. 

The  business  of  the  bank  was  to  receive,  to  keep  and  to  pay. 
The  payments  were  made  by  a  transfer  from  the  account  of  the 
payer  to  that  of  the  receiver :  this  was  done  by  the  party  trans 
ferring,  in  person,  or  by  his  agent  specially  authorized,  and  by 
his  delivering  to  the  proper  officer  of  the  bank  a  written  order, 
or  check ;  thus : 

Folio  1609. 

Messrs.  Commissioners  of  the  Bank  —  Please  pay  to  Isaac  Dewitt 
the  sum  of  One  Thousand  Florins,  Four  Sols  and  Six  Deniers. 

Amsterdam,  25th  March,  1709. 
F.1000  4s.  Qd.  SAMUEL  MOSES. 

On  presentation  of  this  paper  by  the  drawer,  or  his  special 
agent,  the  sum  expressed  was  debited  to  the  drawer,  and  credited 
to  the  party  to  whom  the  payment  was  directed  to  be  made. 
The  amount  thus  transferred  could  not  be  again  transferred 
until  the  next  day,  except  on  a  few  special  occasions.  The  bank 


THE    BANK    OF    AMSTERDAM.  177 

was  shut  fifteen  days  in  January  and  July  of  each  year,  in  which 
time  the  books  and  accounts  were  all  closed,  and  opened  anew. 
Special  scrutiny  and  comparison  was  instituted  at  the  opening 
of  the  new  accounts,  to  see  if  the  bank  statements  agreed  with 
those  of  the  depositors.  For  the  three  days  following  the  open 
ing  of  the  bank,  parties  were  permitted  to  transfer  amounts 
received  by  them,  at  their  pleasure.  The  bank  was  open  every 
day,  from  7  A.  M.  to  3  P.  M.  ;  but,  after  11  A.  M.,  every  transfer 
cost  six  sols,  the  charge  before  that  hour  being  two  sols.  There 
were,  besides,  other  charges  and  fines  not  material  to  be  detailed. 
The  number  in  the  margin  of  the  check  was  the  folio  of  the  bank 
book  in  which  the  account  was  kept.  The  accounts  were  num 
bered  from  one  onward,  and  the  folio  was  made  to  correspond. 
Each  clerk  had  a  specified  number  of  accounts ;  and  when  a 
check  was  presented  to  the  clerk  in  charge  of  the  proper  folio, 
he  could  at  once  turn  to  the  page,  write  off  the  amount,  and 
make  the  transfer. 

The  operation  of  this  mode  of  payment  would  permanently 
absorb  an  amount  of  the  precious  metals  equal  to  the  largest 
sum  employed  at  any  one  period,  and  of  course  more  than  would 
be  required  for  the  average  payments.  As,  according  to  the 
theory  of  the  bank,  money  once  deposited  was  never  again 
restored  to  circulation,  the  tendency  would  have  been  to  swell 
the  bank  credits  to  a  larger  sum  than  was  required  for  current 
payments,  and  of  course  to  diminish  their  value.  This  was  met 
by  a  policy,  on  the  part  of  the  bank,  which  overcame  that 
difficulty,  and  became  a  source  of  profit  to  the  bank,  and  to 
brokers. 

When  it  was  found  there  were  too  many  bank  credits  in  the 
market,  which  was  shown  by  their  being  freely  offered  for  sale, 
brokers  were  employed  by  the  bank  to  purchase  them  at  four 
per  cent,  premium.  This  practice  grew  into  a  regular  business : 
brokers  were  always  furnished  with  bank  credits  to  sell  at  five 
per  cent,  premium,  and  with  coin  to  purchase  them  at  four. 
This  kept  the  price  within  a  range  of  one  per  cent.,  and  always 
at  a  premium,  except  on  very  extraordinary  occasions.  A  desira 
ble  equilibrium  was  thus  maintained  by  a  simple  contrivance,  by 
12 


178  SPECIAL    DEPOSITS. 

which  the  medium  set  apart  for  payment  of  debts  was  preserved 
from  diminution,  and  from  irregularity  in  value.1 

The  bank  also  received  on  special  deposit  any  amount  of 
bullion  or  coin  offered ;  each  sum  being  counted,  weighed,  and 
placed  in  sacks,  upon  which,  if  gold,  the  depositor  placed  his 
seal.  A  receipt  (recipisse)  was  given  him,  in  this  form  :  — 

Amsterdam,  1  March,  1700. 

Jean  Dewitt  has  deposited  in  Bank  One  Thousand  Louis  d'Or,  at  the 
rate  of  Ten  Florins  and  Fourteen  Sols  each,  upon  condition  that  he  may 
withdraw  them  within  the  space  of  six  months,  paying  one-quarter  per 
cent.,  or,  in  default  thereof,  that  they  shall  be  taken  by  the  Bank  at  the 
rate  above-named. 

Flo.  10.700.    .  N.  N. 

For  the  Bank. 

The  party  making  this  deposit  could  renew  his  right  to  with 
draw  the  identical  specie,  from  six  months  to  six  months,  pay 
ing  each  time  the  regular  charge  of  half  per  cent,  for  bullion, 
and  a  quarter  for  all  coins,  except  ducatoons,  which  were 
charged  only  one-eighth.  The  amount  of  his  deposit  was  imme 
diately  carried  to  his  credit  in  account,  and  became  transferable 
like  other  bank  credits.  The  recipisse  was  also  negotiable  and 
marketable,  varying  in  value  with  the  kind  of  coin  or  bullion  it 
represented.  If  not  suffered  to  expire  by  its  limitation  of  six 
months,  the  holder  could  always  withdraw  the  special  deposit  it 
described  by  returning  the  recipisse,  and  transferring  an  equiva 
lent  amount  of  bank  credit.  While  the  credits  thus  obtained 
were  passing  on  the  books  of  the  bank  in  the  current  payments 
of  the  day,  the  recipisse,  or  right  to  withdraw  the  special  deposit, 
was  passing  from  hand  to  hand  among  the  dealers  in  coins  and 
bullion. 

These  bank  deposits  continued  to  fulfil  their  functions  with 
great  regularity  and  effectiveness.  In  large  transactions,  such 
as  the  payment  of  bills  of  exchange,  the  risk  appeared  to  be 
reduced  to  the  lowest  possible  degree,  and  the  immense  trouble 
with  coinage  was  wholly  overcome. 

1  "  Universal  Merchant,"  by  Donald  Magens.  American  ed.,  p.  178,  &c. 
"  Stewart's  Pol.  Econ."  vol.  ii.,  p.  292,  4to  ed. 


CIRCULATION    OF    RECIPISSES.  179 

The  bank  received  its  first  serious  check  in  1672,  sixty-three 
years  after  its  establishment.  When  the  French  army  had  entered 
the  Low  Countries,  and  had  taken  Utrecht  and  many  other  places, 
an  alarm  for  the  safety  of  the  deposits  in  the  Bank  of  Amster 
dam  spread  over  the  whole  country.  The  depositors,  although 
not  strictly  entitled  to  draw  their  deposits,  in  what  they  deemed 
the  imminent  hazard  of  the  bank,  demanded  coin  for  their 
respective  credits.  The  demand  was  complied  with  promptly, 
so  long  as  it  continued.  Those  living  at  a  distance  from  Am 
sterdam  sold  their  credit  even  at  a  discount  of  five  or  six  per 
cent.,  which  was  equivalent  to  a  total  loss  of  ten  or  twelve  per 
cent.,  as  these  credits  were,  at  all  ordinary  times,  worth  five  or 
six  per  cent,  more  than  par.  The  alarm  was  soon  over,  and 
the  bank,  not  having  been  violated  by  the  French  army,  was 
soon  again  in  possession  of  all  its  treasures. 

There  were  times,  also,  when  bank  credits  went  above  the 
the  usual  premium  of  five  per  cent.  The  usual  range  of  these 
fluctuations  was  four  to  six  per  cent.,  and  furnished  a  class  of 
brokers,  and  dealers  in  coin  and  bullion,  a  very  profitable  busi 
ness.  They  were  equally  ready  to  serve  those  who  wished  to  sell 
or  to  buy  coin  or  bank  credits  ;  and  their  operations,  as  well  as 
those  of  a  similar  kind  in  which  the  bank  was  interested,  while 
they  tended  to  increase  the  number  of  the  fluctuations,  kept  the 
price  within  a  narrow  range.  The  dealing  in  coins,  as  repre 
sented  by  the  recipisses  of  the  bank,  could  be  carried  on  with 
very  little  capital.  The  holder  of  a  recipisse  for  1000  louis  d'or 
might  sell  the  right  to  receive  these  coins  for  10  florins,  and  the 
purchaser  could  only  withdraw  them  by  transferring  the  equiva 
lent  in  bank  credit. 

So  the  coins  or  bullion  could  be  deposited,  and  be  used  for 
payment  of  debts,  while  the  depositor  could  avail  himself  of  any 
rise  in  its  value.  The  recipisses  became,  therefore,  so  many 
footballs  for  speculation.  It  was  a  mode  of  dealing  in  the  fluc 
tuations  of  coin,  without  being  obliged  to  hold  the  coin.  The 
right  to  the  coin  was  the  subject  of  their  speculative  dealing, 
and  not  the  coin  itself.  An  active  competition  was  easily  main- 


180  REMOVAL    OF    THE    DEPOSITS. 

tained,  in  a  business  requiring  no  capital.     It  tended  greatly  to 
increase  the  deposits  in  the  bank. 

For  almost  two  centuries  the  bank  enjoyed  unimpeached 
credit,  performing  all  its  functions  with  unceasing  steadiness, 
and  greatly  to  the  benefit  and  commercial  prosperity  of  Amster 
dam.  The  amount  of  treasure  amassed  in  its  vaults  has  been 
variously  estimated  at  from  five  to  eighty  millions  sterling.  If 
ten  millions  sterling  be  taken  as  a  safe  estimate,  and  it  be 
assumed  that  the  whole  capital  was  moved  only  one  hundred 
times  in  a  year,  its  payments  in  that  time  would  amount  to  one 
thousand  millions  sterling,  or  $4,800,000,000.  The  transfers 
of  this  enormous  sum  were  made,  during  that  long  period,  in  un 
hesitating  confidence  as  to  the  security  of  the  deposit.  The  bank 
permitted  no  scrutiny  into  its  condition,  and  rendered  no  account 
to  the  public ;  but  merchants  never  doubted  the  validity  of  a 
security  which  was  incessantly  used  in  paying  debts.  In  1790, 
it  was  discovered  that  a  large  portion  of  the  famous  deposit  had 
disappeared  fifty  years  before,  and  that  a  gradual  diminution 
had  been  taking  place  during  that  period,  until  the  actual  quan 
tity  remaining  was  small  indeed.  The  amount  withdrawn  had 
been  lent  to  the  East  India  Company,  the  Provinces  of  Holland, 
and  the  City  of  Amsterdam,  none  of  which  were  in  a  condition 
to  make  instant  restitution.1  The  bank  failed,  because  its  guar 
dians  had  been  unfaithful  to  their  trust.  Before  this  breach  of 
trust  became  known,  transfers  of  the  abstracted  deposits,  and 
payments  by  them,  had  been  made  to  the  value  of  hundreds  of 
millions  sterling  per  annum ;  yet  these  payments  were  ever  after 
unquestioned,  as  to  their  validity  and  efficiency.  No  evil  or  dis 
advantage,  no  check  to  commerce,  was  felt  until  the  abstraction 
was  discovered,  and  the  loss  fell  upon  the  holders  of  that 
moment. 

1  It  is  marvellous  that,  with  the  example  of  the  Bank  of  Venice  before 
them,  the  Bank  of  Amsterdam  was  not  reconstructed  upon  the  principle  of 
transferring  public  debt. 


THE    BANK    OF    HAMBURG.  181 

g  2.     The  Bank  of  Hamburg. 

The  Bank  of  Hamburg  was  established  in  1619,  ten  years 
after  that  of  Amsterdam.     The  extreme  inconvenience  of  a  dete 
riorated  coinage  from  various  mints,  of  differing  standards,  com 
pelled  the  merchants  to  resort  to  this  mode  of  relief,  availing 
themselves,  however,  of  the  co-operation  and  guarantee  of  the 
city.     One  of  the  effects  of  the  circulation  of  base  coin  was  to 
produce  an  unfavorable  foreign  exchange  —  a  great  grievance  at 
a  free  port  like  Hamburg.     The  whole  evil  was  so  great,  as  to 
evince  that  the  abuses  of  coinage  may  be  a  serious  check  to 
trade.     The  remedy  was  that  previously  adopted  at  Amsterdam, 
to  lock  up  the  coins,  and  circulate  the  credit  granted  for  them. 
The  bank  at  first  received  on  deposit  only  the  rix  dollars  of  the 
German  Empire  —  a  silver  coin  of  approved  standard.     It  was 
supposed  that  coins  thus  deposited  in  the  vaults- of  the  bank 
would  be  safe  from  the  whole  army  of  sweaters,  pluggers  and 
clippers ;  that  they  could  not  suffer  by  wear ;  and  that  they 
would  be  safe  from  burglars,  robbers  and  pirates.     They  disco 
vered,  in  process  of  time,  that  there  was  an  insidious  mode  of 
attack,  from  which  the  bank  did  not  escape,  with  all  their  cau 
tion.     The  mint  of  the  Empire  issued  coins  of  the  same  name 
and  apparent  value,  but  of  a  lower  standard  than  those  which 
the  bank  had  received.      These  being  put  into  circulation,  soon 
found  their  way  into  the  bank.     Those  merchants  who  were  in 
the  secret  were  able  to  drive  a  very  successful  business  by  depo 
siting  the  new,  and  withdrawing  the  old  coins.     Before  the  mis 
take  was  discovered,  a  large  proportion  of  the  new  coins  had 
found  their  way  into  the  bank,  to  the  great  dismay  of  the  mana 
gers.     The  new  coin  was  of  less  value  than  the  old,  in  the  pro 
portion  of  516  to  540,  or  nearly  five  per  cent.  less.     This  pro 
duced  so  great  a  disturbance,  that  for  a  time  the  bank  was  shut. 
The   difficulty  was   adjusted  by  assuming   an  average   on  the 
above  proportion,  say  528 ;  and  upon  this  the  accounts  of  all 
the  depositors  were  adjusted.      This  marc  banco  was  not  repre 
sented  by  any  coin ;  but  from  that  time,  in  1T70,  it  has  con 
tinued  to  be  the  unit  of  the  money  of  account  of  the  bank.     At 


182  FORM    OF    GOVERNMENT. 

the  same  time,  having  had  this  experience  of  the  danger  to  be 
apprehended  from  mints  of  a  foreign  power,  it  was  decided  that 
the  bank  should  receive  ingots  of  silver  or  coin  only  as  bullion. 
Every  deposit  was  duly  assayed  or  tested,  and  the  credit  on  the 
books  given  accordingly.  The  standard  adopted  was  one  of 
alloy  to  47  parts  fine.  The  bank  money  thus  established  has 
proved,  according  to  the  best  authorities,  one  of  the  least  vari 
able  in  Europe.  For  a  long  period  it  has  stood  at  a  premium 
above  the  currency  of  coins  in  general  circulation,  from  20  to 
25  per  cent,  premium.  This  argues  very  strongly  that,  however 
circulating  coins  may  suit  for  the  purposes  of  small  change  in 
the  retail  trade,  they  do  not  suit  for  the  large  operations  of 
banking  and  foreign  exchange.  In  all  operations  of  foreign  ex 
change,  coins  can  only  be  regarded  and  treated  as  bullion ;  and 
large  dealers  in  coins  are  compelled  to  be  governed  by  the  prin 
ciples  which  -govern  foreign  exchange. 

The  bank  is  under  the  government  of  five  directors,  two  coun 
sellors,  two  treasurers,  and  two  of  the  principal  magistrates  of 
the  city :  one  of  each  kind  goes  out  annually.  The  vaults  in 
which  the  treasure  is  placed  have  each  five  different  locks,  and 
each  director  holds  the  key  to  one  of  these  locks,  so  that  no 
vault  can  be  opened  without  the  whole  five  directors  being  pre 
sent.  No  employee  of  the  bank,  and  no  broker,  is  allowed  to 
open  an  account ;  for  brokers  in  Hamburg  are  not  regarded  as 
merchants,  and  do  not  enjoy  their  privileges ;  only  merchants 
and  citizens  of  Hamburg  are  permitted  to  open  accounts.  A. 
loan  office  is  connected  with  the  bank,  which  is  permitted  to  lend 
bank  money  on  pledge  of  gold,  silver  and  jewels,  to  the  amount 
of  three-fourths  of  their  value.  The  officers  of  the  bank  have 
the  management  of  the  mint,  and  the  coinage  of  the  city. 

The  credit  of  this  bank  has  been  rarely  shaken.  It  endured 
a  severe  trial  from  the  confusion  in  the*  coinage  above  men 
tioned  ;  it  once  over-extended  its  loans  on  pledges ;  and  it  was 
wholly  absorbed  by  one  of  Napoleon's  Marshals,  Davoust,  who 
took  all  its  money  for  his  army.  The  French  government  sub 
sequently  made  restitution,  and  the  bank  resumed  its  position 
and  operations. 


MODE    OF    BUSINESS.  183 

The  mode  of  payment  at  the  Bank  of  Hamburg  is  substan 
tially  the  same  as  that  which  we  have  described  as  having  been 
followed  at  Amsterdam.  The  same  regulation  of  one  transfer 
of  the  same  sum  daily,  unless  on  special  occasions :  the  same 
strictness  as  to  the  hours  of  business  at  the  bank  —  the  time  of 
transferring  being  from  7  to  10  o'clock  A.  M. ;  with  the  permission 
from  10  to  1  P.  M.,  and  from  3  to  5  P.  M.,  by  paying  for  the 
privilege.  The  times  for  inquiring  whether  transfers  had  been 
made  were  the  same,  but  writh  a  charge  if  the  information  was 
required  at  the  two  later  periods.  These  charges  were  usually 
compounded  with  the  clerks  for  a  fixed  sum,  on  payment  of 
which  information  could  be  had  at  all  hours.  These  regulations 
are  by  no  means  necessary  or  incident  to  such  banks.  There  is 
no  reason  why  the  deposits  in  such  banks  could  not  be  trans 
ferred  by  checks  as  rapidly  as  the  deposits  of  the  Bank  of  Eng 
land,  or  the  banks  of  the  United  States.  And  this  would  be 
giving  to  the  precious  metals  all  the  efficiency,  in  commercial 
payments,  of  which  they  are  susceptible. 

The  Bank  of  Hamburg  is,  to  this  day,  a  living,  useful  and 
flourishing  establishment.  It  is  a  proof  that,  although  institu 
tions  and  devices  of  credit  have  long  since  far  outstripped,  in 
effectiveness,  any  possible  application  of  the  precious  metals  to 
the  business  of  commercial  payments,  yet  there  is  no  good  rea 
son  why  every  proper  method  should  not  be  adopted,  of  making 
coins  and  bullion  available,  in  the  payments  of  trade,  to  the 
utmost  extent  of  which  they  are  susceptible.  There  can  be  no 
doubt  that  there  is  room,  in  every  important  commercial  city  in 
the  world,  for  a  bank  whose  business  it  should  be  to  receive, 
hold  and  allow  the  transfer  of  deposits  of  gold  and  silver  bullion 
brought  to  a  common  standard,  or  all  fine,  and  without  alloy. 
They  could  be  thus  rapidly  circulated  in  payment,  and  be  ready 
for  any  emergency  or  demand. 


NOTE    TO    CHAPTER    VI. 

THE  BANK  OF  AMSTERDAM. 

WE  have  ample  accounts  of  the  Bank  of  Amsterdam.  Its  central  posi 
tion,  in  reference  to  the  trade  of  Europe,  gave  it  great  prominence  from  the 
time  of  its  establishment,  and  during  all  its  career  of  nearly  two  centuries. 
The  great  prosperity  of  Holland,  as  commercial  agent  for  other  countries, 
not  only  increased  the  business  of  the  bank,  but  made  it  more  extensively 
known. 

Simple  as  its  constitution  was,  to  many  it  appeared  a  mystery ;  and  by 
merchants  only  were  its  real  benefits  and  functions  understood.  Joseph 
Marshall,  an  intelligent  English  traveller,  who  visited  Amsterdam,  and  ex 
tended  his  travels  over  all  northern  Europe,  in  1768,  1769  and  1770,  after 
referring  to  the  great  fame  of  this  bank,  proceeds :  —  "  Here  a  natural 
question  may  be  stated :  What  is  the  use  of  such  a  bank  ?  The  excellence 
of  a  bank  of  circulation  is  evident  at  first  sight :  by  circulating  paper,  they 
have  it  in  their  power  to  remedy  numerous  evils,  which,  in  certain  situations 
of  affairs,  attend  a  languid  circulation  of  coin.  If  money  is  too  scarce,  such 
an  institution  may  make  it  plentiful:  and  another  great  utility  (at  least  it 
has  been  so  esteemed  in  England)  is  that  of  issuing  large  quantities 
of  paper,  to  supply  the  home  demand  for  a  currency,  while  the  pre 
cious  metals  are  at  liberty  to  go  abroad  in  whatever  method,  or  on  what 
ever  business,  the  merchants  may  find  advisable,  in  order  to  increase  their 
commerce  and  their  fortunes  at  the  same  time.  But,  on  the  contrary,  a 
bank  of  deposit  is  not  attended  with  any  of  these  conveniences  :  circulation 
is  much  impeded  by  it.  The  circulation  of  a  million  of  guilders  is  attended 
with  certain  advantages  in  the  United  Provinces,  by  animating  industry. 
Suppose  the  million  is  locked  up  in  the  bank :  it  may  be  said  they  will  still 
circulate  in  the  books  of  the  bank :  true,  they  circulate  at  Amsterdam,  but 
nowhere  else.  Thus  the  establishment  of  a  bank  of  deposit  has  only  the 
effect  of  fixing  a  vast  portion  of  all  the  wealth  and  trade  of  a  country  in  one 
spot ;  of  which  Amsterdam,  with  the  worst  harbor,  yet  possessing  the  most 
trade  of  any  town  in  Holland,  is  a  pregnant  instance.  This  local  advantage 
of  facilitating  circulation  in  one  spot,  in  prejudice  of  all  others,  is  surely  a 
partial  decision  in  its  favor.  In  a  political  point  of  view,  it  may  be  pro 
nounced  dangerous  to  the  State.  A  foreign  enemy  attacking  a  town,  or  a 

(184) 


NOTES    TO    CHAPTER    VI.  185 

province,  is  an  evil  that  can  be  remedied ;  but  what  if  an  invader  lays 
siege  to  a  bank  ?  What  ruin  and  confusion  must  ensue  ?  Banks  of  circu 
lation  are  open  to  some  accidents,  but  not  a  twentieth  part  of  those  of 
deposit. 

"  The  treasure  of  the  Bank  of  Amsterdam  is  an  absolute  secret  to  all,  but 
those  who  have  the  government  of  it.  The  value  has  been  computed,  or 
rather  guessed,  at  from  20  to  40,000,000  sterling ;  but  naming  any  particu 
lar  sum  must  be,  at  best,  but  wild  work.  It  is,  however,  a  very  astonish 
ing  system  of  accumulation  ;  for  it  is  a  well-known  fact,  that  money  once 
paid  and  entered  in  the  bank  books  can  never  be  demanded ;  and  it  is  a 
well-known  fact,  that  money  is  perpetually  paid  in.  Here,  therefore,  seems 
to  be  a  constant  ingress,  but  no  egress ;  consequently  a  treasure  which 
seems  constantly  to  increase."  —  Marshall's  Travels  through  Holland,  &c., 
vol.  i.,  page  53. 

This  expresses  the  opinion  entertained  by  many  common  observers  of 
the  Bank  of  Amsterdam,  but  more  especially  of  Englishmen.  It  is  not, 
then,  universally  conceded  that  banks  of  deposit  are  safer  than  those  of  cir 
culation.  On  one  point  which  excited  the  concern  of  this  traveller,  Sir 
James  Stewart  sheds  some  light:  —  "  The  city  of  Amsterdam  knows,  from 
long  experience,  the  rate  of  demand  for  bank  money ;  and  it  is  not  to  be 
supposed  that,  upon  any  sudden  emergency  which  may  heighten  that  de 
mand  for  a  time,  they  should  be  such  novices  as  to  increase  the  credit  upon 
their  books  so  far,  as  to  run  any  risk  of  overstocking  the  market  with  it."  . 
.  .  "  During  my  stay  in  Holland,  I  was  at  great  pains,  to  no  purpose,  to 
ascertain  whether  the  bank  ever  issued  any  part  of  their  credit  cash  upon 
such  occasions."  ..."  The  popular  opinion  is,  that  coin  is  taken  out  for 
the  service  of  the  State  :  the  opinion  of  many  intelligent  men  is  quite  con 
trary."  .  .  .  "My  opinion  is,  that  every  shilling  written  in  the  books  of 
the  bank  is  actually  locked  up,  in  coin,  in  the  bank  repositories.  That 
although,  by  the  regulations  of  the  bank,  no  coin  can  be  issued  to  any  per 
son  who  demands  it  in  consequence  of  his  credit  in  bank,  yet  I  have  not 
the  least  doubt  but  that  both  the  credit  written  in  the  books  of  the  bank,  and 
the  cash  in  their  repositories  which  balances  it,  may  suffer  alternate  augmen 
tations  and  diminutions,  according  to  the  greater  or  less  demand  for  bank 
money."  ..."  There  are  upon  the  square  before  the  town-house  of  Am 
sterdam,  between  10  and  11  in  the  morning,  a  number  of  cashiers,  whose 
business  it  is  to  buy  and  sell  bank  credit  for  current  coin.  They  bargain 
with  all  those  who  have  occasion  either  to  buy  or  sell  ;  and,  according  to 
the  demand  for  specie  or  bank  credit,  the  agio  rises  or  sinks  :  and  as  these 
cashiers  must  constantly  gain,  whether  they  furnish  bank  credit  or  current 
coin,  since  they  are  never  demanders  in  either  operation,  it  is  commonly 
found  that  there  is  in  their  favor  about  -fa,  or  perhaps  \  per  cent.,  accord 
ing  to  the  revolutions  of  the  demand ;  that  is  to  say,  one  who  would  first 
buy  specie,  and  then  sell  it,  would  lose  {,  or  perhaps  but  T^,  by  his  opera- 


186  NOTES    TO    CHAPTER    VI. 

tion."  .  .  .  "  It  is  a  matter  of  fact,  that  the  bank  lends  both  coin  and 
credit  to  the  brokers,  cashiers  or  lombards,  who  are  constantly  on  the  square 
before  the  town-house."  ..."  Whenever,  therefore,  the  bank  finds  that 
the  agio  falls  too  low  with  respect  to  coin,  and  when,  in  consequence  of ' 
that,  the  demand  for  coin  increases,  then  they  lend  coin  out  of  their  reposi- 
torjes  to  the  brokers;  and  when  it  rises,  they  lend  credit.  This  coin 
the  brokers  dispose  of  to  those  who  have  bank  money,  and  who  want  to 
convert  it  into  coin.  They  sell  the  coin  for  bank  credit ;  the  purchaser 
writes  off  the  transfer  in  favor  of  the  broker,  and  he  again  repays  the  value 
of  the  coin  to  the  bank,  by  transferring  the  credit  he  obtained  for  the  coin 
in  favor  of  the  bank.  This  done,  the  bank  may  expunge  this  credit  from 
their  book,  by  which  means  their  deposit  of  coin  is  diminished,  and  also  a 
corresponding  amount  of  credit."  ..."  If,  on  the  other  hand,  those  who 
have  coin  find  it  will  not  serve  their  purpose  as  well  as  bank  credit;  they 
come  with  it  to  the  brokers,  who  sell  them  bank  credit  for  it :  this  coin  the 
brokers  deliver  to  the  bank,  which  writes  off  the  credit  lent  to  the  broker 
in  favor  of  him  who  has  paid  his  coin  for  it."  .  .  .  "  It  is  a  curious  method 
of  preserving  an  exact  proportion  between  the  coin  on  deposit,  the  credit 
written  in  their  books  of  transfer,  and  the  demand  for  bank  money."  — 
"Inquiry  into  the  Principles  of  Political  Economy"  by  Sir  James  Stewart, 
4to  edit.,  vol.  ii.,  page  298,  &c. 

"  The  value  of  bank  money  was  formerly  very  uncertain,  as  the  agio 
often  varied  from  9  per  cent,  to  par.  These  variations  were  partly  occa 
sioned  by  the  actual  condition  of  commerce  at  the  respective  periods,  but 
chiefly  by  the  schemes  of  brokers,  stock-jobbers,  &c.  To  prevent  the  possi 
bility  of  these  great  variations,  the  bank  came  to  a  resolution,  some  years 
since,  to  sell  bank  money  for  currency  at  5  per  cent.,  and  to  buy  at  4  per 
cent,  agio  ;  which  measure  has  effectually  answered  the  purpose,  by  keep 
ing  the  market  price  between  those  extremes."  —  "Universal  Merchant," 
by  D.  Magens,  1753 ;  Phila.  edit.,  1797,  page  180. 

Those  who  wish  for  further  information  in  relation  to  the  Bank  of  Am 
sterdam  may  consult,  among  many  others,  the  following  works  :  — 

"A  General  Treatise  of  Moneys  and  Exchanges"  by  A.  J. ;  4to:  London, 
1708,  page  351.  "Traits  General  du  Commerce,"  by  S.  Eicard,  5th  edit., 
par  N.  Struyk :  Amsterdam,  4to,  1732,  page  146.  The  same  work  enlarged 
to  3  vols.  4to:  Paris,  1799;  vol.  i.  p.  74.  "Guide  des  Negocians,"  par  M. 
Laurent  Lipp:  Montpellier,  1793,  2  vols.  4to  ;  vol.  i.  p.  63.  "  Universal  Mer 
chant,"  by  D.  Magens,  edition  of  J.  Aldrich :  Philad,,  1797,  page  177. 
"Smith's  Wealth  of  Nations,"  book  iv.  chap.  iii.  "M'Pherson's  Annals  of 
Commerce,"  4  vols.  4to :  London,  1305  ;  vol.  ii.  p.  253. 

M'Pherson  says :  —  "  The  best  and  most  copious  account  of  the  Bank  of 
Amsterdam  ever  published  in  the  English  language  is  that  which  was  com 
municated  by  Mr.  Hope,  of  Amsterdam,  to  Dr.  Smith,  who  has  inserted  it 
in  his  '  Wealth  of  Nations.' " 


NOTES    TO    CHAPTER    VI.  187 

Any  one  who  will  take  the  trouble  to  compare,  will  find  that  Mr.  Hope's 
account  is  taken  from  the  books  above  referred  to ;  and  although  the  state 
ment  is  well  drawn  up,  many  important  particulars  not  inserted  will  be 
found,  by  the  diligent  inquirer,  in  the  works  above  quoted,  as  well  as  in 
those  referred  to  below :  — 

"  Cours  d' Economic  Politique,"  par  Henri  Starch,  4  vols.  8vo :  Paris,  1823 ; 
Tol.  iv.  page  96  "Inquiry  into  tlie  Principles  of  Political  Economy"  by  Sir 
James  Stewart,  2  vols.  4to :  London,  1768 ;  vol.  ii.  p.  292.  "  Kaufmans- 
Lexicon,"  von  Carl  Gunther  Ludovici,  5  vols.  8vo:  Amsterdam:  Leipsic, 
1768.  "  Banken  und  Munzivesen,"  von  J.  G.  Busch,  8vo:  Hamburg, 
1824,  page  169.  "  Dictionnaire  Universal  de  Commerce,"  par  Jaqu.es  Savary 
des  Bruslmis,  4  vols.  folio :  Geneva,  1742 ;  Art.  "  Banque,"  vol.  i.  p.  278. 
"Kelly's  Cambist,"  Art.  "Amsterdam."  "Beschreibung  der  Banquen,"  von 
P.J.  Marperger,  4to:  Leipsic,  1717,  page  119.  "  Postletliwaite' s  Dictionary 
of  Commerce"  2  vols.  folio.  Sir  William  Temple's  Works,  folio,  vol.  i. 
page  32. 

THE   BANK   OF   HAMBURG. 

Very  full  details  respecting  the  Bank  of  Hamburg  may  be  found  in  the 
books  referred  to  under  the  proper  heads  ;  but  more  especially  in  that  of 
J.  G.  Busch,  translated  into  French,  with  the  title :  "La  Banque  de  Ham- 
bourg  rendue  facile." 


CHAPTER    VII. 

1 1.  Distinction  between  credit  and  the  credit  system  —  The  latter  defined  — 
Involves  a  separation  of  the  business  of  payments  from  the  business  of  dis 
tributing  commodities,  aud  makes  trade  virtually  a  barter — The  great  divi 
sion  of  labor  makes  this  necessary  —  Relations  of  debtor  and  creditor 
mutual,  and  exist  mainly  among  the  same  classes — The  fund  out  of  which 
debts  are  paid  arises  from  the  credits  which  are  the  counterpart  of  the 
debts  —  Circulation  of  credits  as  a  currency  —  Convertibility  carried  too 
far  —  Evils  of  blending  credits  and  money  —  Diversion  of  credits  from 
their  proper  functions  —  Order  of  considering  this  subject. 

CREDIT,  in  no  one  of  its  meanings,  is  the  same  thing  as  the 
credit  system;  the  latter  implies  the  former,  but  the  former 
does  not  include  the  latter.  Credit  refers  chiefly  to  the  confi 
dence  which  dealers  repose  in  each  other,  and  to  the  consequent 
postponement  of  payment  upon  transactions  of  sale.  When  one 
sells  and  delivers  goods  to  another,  agreeing  to  receive  payment 
at  a  future  day,  that  is  giving  credit  upon  one  side,  and  taking 
it  upon  the  other ;  but  this  transaction  may  not  fall  within  the 
credit  system,  which  imports  something  more  than  personal  con 
fidence  and  deferred  payment.  The  credit  system  is  that  by 
which  not  only  personal  confidence  exists  between  the  parties, 
inducing  them  to  sell  and  deliver  goods,  and  defer  the  payment, 
but  by  which  the  payment  is  eventually  effected,  without  resort 
to  coin,  bullion,  or  any  similar  equivalent :  it  is  that  by  which 
commodities  or  services  are  made  to  pay  for  commodities  or  ser- 
•  !. vices :  it  is  a  system  by  which  men  apply  their  credits  to  the 
4  extinguishment  of  their  debts.  It  embraces  all  the  devices  by 
which  payments  are  properly  made,  without  the  use  of  the  pre 
cious  metals,  except  cases  of  strict  barter. 

Under  the  credit  system,  no  equivalent  is  given  at  the  time 
of  sale,  the  payment  being  postponed  for  a  time  definite  or  inde- 

(188) 


THE    CREDIT    SYSTEM.  189 

finite;  the  payments  for  commodities  are  separated  from  the 
actual  transactions  of  sale  and  purchase ;  the  articles  of  trade 
are  bought  and  sold,  and  distributed  for  consumption  at  home 
and  abroad  —  the  payments  accruing  being  reserved  for  a  sepa 
rate  and  a  distinct  department  of  commerce. 

This  is  in  direct  contrast  with  the  cash  or  money  system,  in 
which  every  article  is  either  paid  for  in  the  precious  metals  at 
the  time  of  delivery,  or  at  some  time  afterwards.  These  two 
systems  work  side  by  side ;  and  though  frequently  much  blended 
in  operation,  the  distinction  between  them  is  plain  enough  to  be 
always  kept  in  view.  It  must,  indeed,  be  strictly  regarded  by 
those  who  would  understand  the  subject  of  money  and  credit. 

The  importance  of  the  credit  system  may  be  estimated  from 
the  fact,  that  in  Great  Britain  and  the  United  States  more  than 
95  per  cent,  in  value  of  all  the  payments  of  business  and  of 
trade  are  effected  by  its  means.  The  credit  system  is  employed 
with  effect  wherever  civilization  extends  ;  and  it  may  be  added, 
in  not  very  far  from  the  proportion  in  which  civilization  pre 
vails.  It  deserves,  therefore,  not  only  to  be  studied,  but  to  be 
understood  in  its  most  simple  elements,  as  well  as  in  its  most 
extensive  ramifications. 

Next  to  the  industry  which  is  applied  to  the  actual  produc 
tion  of  the  commodities  of  human  use  and  consumption,  the  chief 
business  of  men  in  civilized  society  is  to  exchange  these  commo 
dities,  one  for  another.  In  the  subdivision  of  labor  which  then 
takes  place,  the  whole  production  is  so  divided  that  each  man, 
or  class  of  men,  makes  but  one  thing,  or  but  the  part  of  one 
thing.  This  makes  an  incessant  process  of  exchange  necessary. 
Each  producer,  or  class  of  producers,  exchanges  his  particular 
product  for  all  the  variety  of  articles  of  food,  raiment,  &c.,  which 
go  to  make  up  his  or  their  entire  consumption.  One  great  prob 
lem  of  industry  is  to  effect  these  exchanges  with  the  greatest 
rapidity,  ease,  and  at  the  least  expense.  If  article  could  be  ex 
changed  for  article,  as  savages  make  their  exchanges,  vast 
expense  would  be  saved.  This,  in  civilized  society,  is  impossi 
ble,  because  of  the  variety  of  products,  and  the  widely  separated 
position  of  the  parties.  To  effect  this  exchange,  and  to  secure 


190  SUBDIVISIONS    OF    INDUSTRY. 

other  important  advantages,  society  has,  with  the  progress  of 
civilization,  resolved  itself  into  various  classes,  which  minister, 
by  this  subdivision,  more  effectually  to  the  general  interests. 
One  class  has  charge  of  civil  administration ;  one  of  education  ; 
one  of  the  public  duties  of  religion ;  one  is  made  up  of  physi 
cians  ;  another  of  lawyers ;  one  is  engaged  in  the  fine  arts ; 
another  in  manufactures ;  another  in  agriculture ;  another  in 
commerce,  or  the  distribution  of  the  products  of  others'  indus 
try;  and  another  in  the  business  of  payments,  as  brokers, 
bankers,  and  dealers  in  exchange.  All  these,  and  many  other 
classes,  require  the  services  or  consume  the  products  of  each 
other.  They  deal  with  each  other  as  classes,  and  as  individuals. 
Every  individual  exchanges  his  services,  or  labor,  or  products, 
for  such  of  all  the  others  as  he  requires.  This  exchange,  though 
often  very  circuitous,  is  certain,  and  occurs  as  the  result  of  the 
business  of  every  individual.  Whatever  the  medium  of  this  ex 
change,  whatever  transactions  intervene,  the  object  of  each 
party  is  simply  to  exchange  what  he  has  to  dispose  of,  whether 
services,  labor  or  commodities,  for  what  he  wishes  to  obtain  from 
others.  Each  individual,  in  fact,  directly  or  indirectly  pays  for 
what  he  purchases  with  that  which  he  has  to  sell.  This,  as  we 
shall  perceive  in  our  further  progress,  is  the  true  basis  of  the 
credit  system. 

The  importance  of  fully  appreciating  the  functions  and  agency 
of  the  money  of  account  becomes  very  apparent  when  we 
attempt  to  enter  upon  the  subject  of  the  credit  system.  In  all 
the  transactions  of  sale  taking  place  under  the  credit  system, 
the  actual  use  of  the  precious  metals  is  dispensed  wifh.  They 
are  only  employed  to  pay  balances  of  account,  and  generally 
only  as  bullion.  It  is  only  in  the  retail  trade  that  coins  are  em 
ployed  in  the  purchase  of  goods.  The  whole  expression  of 
prices,  all  the  entries  of  book-keeping,  all  statements  of  amounts 
in  bills  of  exchange,  promissory  notes,  and  other  securities,  are 
made  in  the  language  of  the  money  of  account.  All  the  trans 
actions  of  trade,  foreign  and  domestic,  which  are  made  verbally 
or  on  paper,  depend  therefore  on  the  agency  of  the  money  of 
account.  Values  are  not  expressed  in  coins,  but  in  money  of 


EXCHANGE    OF    COMMODITIES.  191 

account;  the  price  of  coins  and  bullion  are  thus  stated,  and 
cannot  be  stated  any  other  way.  The  language  in  which  prices 
are  expressed  is  illimitable,  as  the  language  in  which  ideas  are 
expressed.  There  is  no  paucity  in  the  language  of  prices. 
Some  suppose  that  a  strict  relation  exists  between  the  rate  of 
prices  and  the  quantity  of  money  ;  this  supposition  is  ground 
less.  There  is  a  mutual  dependence  between  prices  and  pay 
ments  :  that  is,  if  the  medium  in  which  the  payments  of  a  coun 
try  are  made  becomes  very  scarce,  or  if  the  processes  and 
adjustments  by  the  credit  system  become  disturbed,  and  thus 
checked,  prices  may  be  affected  by  the  necessities  of  the  holders 
of  commodities,  who  may  be  compelled  to  sacrifice  goods  to  meet 
their  engagements.  But  these  reductions  will  not  so  affect  the 
prices  of  other  kinds  of  commodities,  the  holders  of  which  may 
not  be  under  that  necessity.  The  subject  of  prices  will  be  spe 
cially  considered  hereafter;  they  will  be  found  to  depend  far 
more  on  other  elements,  than  on  the  plenty  or  the  scarcity  of 
money. 

The  credit  system  could  not  exist  for  a  day,  but  by  the  aid 
of  a  money  of  account.  It  can  dispense  with  the  use  of  the  pre 
cious  metals  to  a  very  great  extent ;  but  it  cannot  operate  at 
all  but  through  the  agency  of  a  money  of  account.  During  the 
suspension  of  specie  payments  in  Great  Britain,  between  1797 
and  1822,  the  entire  payments  of  the  country,  in  all  transac 
tions  above  the  merest  retail  trade,  were  made  under  the  opera 
tion  and  by  the  devices  of  the  credit  system.  Money  was  not 
employed  in  any  large  payments.  Even  balances  were  paid  in 
notes  of  the  Bank  of  England,  by  law  a  legal  tender  in  payment 
of  all  debts. 

We  have  said  that  the  credit  system  operates  by  a  separation 
of  the  payments  of  business  and  trade  from  the  transactions 
which  originate  the  payments.  The  business  proceeds  in  one 
channel,  and  the  payments  in  another.  This  is  one  instance, 
out  of  many,  of  that  division  of  labor  which  is  extending  to  all 
the  employments  of  society ;  and  in  none  has  it  proved  more 
useful  or  effective  than  in  that  of  payments.  It  has  introduced 
an  economy  which  may  be  said  to  correspond  to  the  difference 


192  DEBTORS    AND    CREDITORS. 

between  the  amount  of  payments  made  in  money  and  the 
amount  made  by  means  of  credit.  It  may  be  doubted  whether 
any  saving  ever  made  in  the  processes  of  business  can  be  com 
pared  with  this. 

By  the  agency  of  money  of  account  all  prices  and  valuations 
are  fixed,  expressed  verbally,  stated  in  writing,  entered  in  books 
of  account,  set  forth  in  promissory  notes,  bills  of  exchange,  and 
other  securities ;  all  the  values  or  amounts  involved  are  thus  stated 
and  preserved  for  adjustment  or  future  payment.  For  every 
article  sold  upon  time  a  debt  and  a  credit  of  exactly  equal  amount 
are  created;  there  is  a  debtor  and  a  creditor  —  the  one  having 
to  pay  the  exact  sum  which  the  other  is  to  receive.  If  the 
debtor  can  purchase  that  credit,  he  becomes  both  the  debtor 
and  creditor,  and  both  debt  and  credit  are  extinguished,  being 
merged  in  the  same  person.  The  same  extinguishment  occurs 
when  some  third  party  assumes  the  place  of  the  debtor,  and 
also  purchases  the  credit ;  both  debt  and  credit  meet  in  the 
same  person,  and  are  merged.  What  is  thus  true  of  every  case 
of  debt  and  credit  between  any  two  persons  who  become  debtor 
and  creditor,  and  of  a  th'ird  party  who  may  step  in  and  take 
the  place  of  both,  is  true  of  the  whole  class  of  debtors  and  cre 
ditors.  To  a  very  large  extent  they  are  the  same  persons, 
because  the  persons  who  take  credit  largely  are  the  persons  who 
give  it  largely.  The  creditors  and  debtors  are,  therefore, 
mainly  the  same  persons.  It  is  among  persons  who  thus 
mutually  occupy  the  relation  of  debtor  and  creditor,  that  the 
credit  system  effects  an  adjustment  or  payment  without  the  use 
of  money.  The  debtor  needs  only  to  purchase  or  redeem  the 
amount  of  credits  which  correspond  to  his  debts.  As  every 
debtor  may  be  presumed  to  have  incurred  his  debt  in  the  pur 
chase  of  some  commodity  which  is  to  be  sold  again  in  the  same, 
or  in  some  other  shape  —  for  to  this  clUss  belongs  the  largest 
class  of  debts  and  credits  —  he  may  be  supposed  to  have  the 
wherewithal  to  pay  his  debt.  The  merchant  who  purchases 
goods  to  sell  again,  or  the  manufacturer  who  purchases  raw 
material  for  his  special  branch  of  industry,  may  be  supposed  to 
have  obtained,  by  incurring  the  debt,  that  which,  when  sold, 


DEBTS    AND    CREDITS.  193 

will  be  of  sufficient  value  to  pay  the  debt.  In  their  positions  it 
is  not  necessary  that  they  should  sell  for  only  gold  or  silver. 
All  they  need  is  to  become  creditors  for  the  amount  of  the  sale, 
and  the  credits  thus  obtained  will,  by  the  adjustments  of  the 
credit  system,  pay  their  debts.  So  any  one  who  is  debtor  and 
creditor  to  the  same  amount  will  be  able,  by  the  devices  of  the 
credit  system,  to  set  one  against  the  other,  and  be  discharged. 
As  the  person  who  sells  commodities  for  gold  or  silver  does  not 
keep  these  metals,  but  employs  them  in  turn  to  purchase  what 
he  may  require,  so  he  who  sells  upon  a  credit,  by  which  another 
person  becomes  his  debtor  in  a  note  or  bill  of  exchange,  does 
not  keep  these  securities,  but  employs  them,  or  the  proceeds  of 
them,  to  make  other  purchases  or  payments.  The  credit  system 
does  not,  then,  really  furnish  a  substitute  for  money,  so  much 
as  a  mode  of  dispensing  with  it.  It  is  dispensed  with  at  the 
time  a  purchase  is  made,  by  stating  the  amount  in  money  of 
account,  and  postponing  the  day  of  payment ;  it  is  dispensed 
with  at  the  day  of  payment,  because  the  debt  is  adjusted  or  paid 
by  a  process  which  does  not  require  the  aid  of  gold  or  silver.  All 
business  men  who  avail  themselves  of  the  credit  system  have 
debts  (notes)  to  pay ;  the  credits  (the  same  notes)  made  by  in 
curring  these  debts  are  the  most  abundant,  as  well  as  the  most 
convenient,  and  the  most  easily  obtainable  medium  in  which  pay 
ment  can  be  effected.  The  debts  are  all  to  be  paid,  and  the 
credits  are  all  to  be  extinguished ;  the  debtors  become  the  active 
agents  in  this.  Debtors  are  under  a  severe  necessity  of  meeting 
every  payment:  no  human  obligation,  however  many  may  be 
the  exceptions,  is  better  observed  than  the  payment  of  debts, 
and  especially  is  this  the  case  among  those  who  most  employ 
the  credit  system.  Credit  is  often  said  to  be  money ;  it  is 
really  and  practically  preferable  to  money,  besides  being,  as  a 
medium,  cheaper ;  it  costs  very  little  more  than  good  faith  and 
good  management.  He  who  employs  a  thousand  dollars  to  make 
a  purchase,  has  first  to  purchase  or  borrow  the  thousand  dollars ; 
whilst  he  who  makes  the  same  purchase  upon  credit  not  only 
purchases  without  money,  but  the  commodities  he  purchases  will 
provide  the  means  to  pay  his  debt.  The  same  commodities  of 
13 


194  THE    CREDIT    SYSTEM. 

trade  or  industry,  on  account  of  which  debts  are  chiefly  con- 
tracted,  being  commodities  in  general  demand,  will  be  sufficient 
to  purchase  or  redeem  credits  enough  to  pay  the  debts  con 
tracted  in  purchasing  them. 

It  will  be  seen,'  by  this,  that  the  credit  system  is  really  a 
mode  of  exchanging  commodities  or  services  without  the  inter 
vention  of  any  medium  of  value.  The  things  to  be  sold  or  ex 
changed  are  valued  in  money  of  account.  The  person  parting 
with  them  takes  a  security  for  the  value,  and  employs  that  secu 
rity  in  the  purchase  of  other  things,  or  in  the  payment  of  debts 
contracted  for  them.  In  short,  by  the  credit  system  men  ex 
change  what  they  have  for  what  they  want ;  the  one  pays  for 
the  other,  according  to  prices  and  sums  stated  in  money  of 
account ;  the  payments  are  made  in  some  of  the  various  ways 
by  which  the  credit  system  effects  its  adjustments.  The  credit 
system  is,  then,  a  complicated  system  of  accounts  between  those 
who  avail  themselves  of  it.  Whether  this  system  is  susceptible 
of  being  simplified,  and  made  still  more  efficient  and  economical, 
deserves  attention ;  but  our  object  is  first  to  make  its  present 
mode  of  operation  well  understood. 

The  processes  of  adjustment  or  payment  by  the  credit  system 
are  very  various  and  complicated,  and  will,  therefore,  be  treated 
hereafter  in  some  detail.  It  may  tend  to  clear  our  conceptions, 
however,  if  we  consider  this  system  in  some  of  its  leading  gene 
ral  features.  We  have  already  remarked  that  the  trade  or  busi 
ness  depending  on  payments  proceeds  as  if  they  were  made  — 
the  making  and  arranging  the  payments  becoming  a  separate 
occupation.  That  this  may  be  done  with  more  efficiency,  the 
whole  indebtedness  becomes,  in  fact,  a  fund  for  this  purpose. 
At  all  times  there  is  a  large  amount,  in  the  aggregate  of  debts, 
incurred  for  goods  sold ;  but  this  aggregate,  however  great, 
agrees  precisely  with  the  amount  of  credits.  There  is,  then,  a 
fund  of  credits,  or  credit  securities,  exactly  equal  to  the  amount 
of  the  debts.  So  long  as  this  fund  of  credits  is  in  the  hands  of 
individuals,  it  is  not  very  active  as  a  medium  of  payment.  But 
when  large  sums  come  to  be  concentrated  in  the  banks,  it  be 
comes  an  efficient  manageable  fund  for  the  extinction  of  debts. 


THE    FUND    OF    THE    CREDIT    SYSTEM.  195 

The  whole  amount  of  the  credits  may,  in  this  way,  become 
available  as  a  medium  of  payment.  It  is  divisible,  at  a  mo 
ment's  warning,  into  sums  of  any  amount ;  and  as  applicable,  in 
payment  of  debts,  as  any  other  medium  could  possibly  be.  As 
all  the  debts  which  originate  in  the  credit  system  are  but  the 
counterparts  of  the  credits,  the  credits  become  an  article  of 
great  demand.  Such,  indeed,  is  the  magnitude  of  the  transac 
tions  carried  on  by  means  of  the  credit  system,  being  more  than 
tenfold  all  others  —  and  such,  of  course,  the  amount  of  the  debts 
and  the  number  of  debtors  —  that  no  demand  is  more  active, 
urgent  and  constant  than  the  demand  of  this  large  class  of 
debtors  for  these  credits,  or  the  means  of  paying  the  debts. 
The  debtors  are,  in  fact,  the  holders  of  the  articles  of  most 
general  consumption ;  for,  that  they  might  be  such  holders,  they 
contracted  the  debts.  They  are,  then,  not  only  under  a  strin 
gent  necessity  of  obtaining  credits  to  pay  their  debts,  but  they 
have  the  best  means  of  obtaining  them ;  having  for  sale,  pur 
posely  selected,  the  commodities  of  daily  consumption  with  the 
use  of  which  the  people  cannot  dispense.  The  credits,  what 
ever  be  the  shape  they  take,  whether  that  of  negotiable  paper, 
bank-notes,  or  bank  deposits,  become  a  general  instrument  of 
purchase,  not  because  they  are  money,  or  representatives  of 
money,  but  because  they  are  the  chief  medium  for  paying  debts; 
and  as  such  are  in  great  demand  among  those  who  have  in 
curred  debts  by  the  purchase  of  articles  of  general  consump 
tion.  The  holders  of  credits  employ  them  in  payments  to  all 
classes  of  society  —  industrial,  professional,  mercantile  and 
literary  —  because  all  yield  commodities  or  services,  and  be 
cause  all  are  consumers.  Credits  are  thus  distributed  through 
a  whole  community,  through  all  the  ramifications  which  the 
wants  of  society  can  produce ;  and  they  flow  thence  to  the 
hands  of  those  who  sell  the  articles  which  all  classes  want  and 
must  have.  The  great  routine  of  the  credit  system  consists  in 
exchanging  commodities  and  services  for  credits,  and  then  in 
distributing  these  credits  widely  and  minutely  in  society,  whence 
they  flow,  under  the  demands  of  constant  consumption,  to  the 
holders  of  the  articles  of  constant  use,  by  whom  they  are  extin- 


196  LIMIT    OF    THE    USE    OF    COINS. 

guished  in  payment  of  their  debts.  This  operation  never  ceases 
its  movements ;  new  credits  and  new  debts  are  created  every 
day ;  old  debts  and  credits  are  merged,  set  off,  or  extinguished 
every  day;  and  the  whole  of  the  intermediate  movements  are 
incessantly  going  on.  In  all  this  multifarious  business  no  money 
is  employed,  and  none  is  needed,  but  the  money  of  account,  ex 
cept  in  small  transactions. 

It  does  not  follow  that  there  is  no  longer  any  office,  use,  or 
agency  for  gold  or  silver  coins.  It  seems  to  be  a  new  proof  of 
the  convenience  and  advantage  of  coins,  that  they  circulate  with 
perfect  facility  along  with  the  currency  of  the  credit  system. 
Either  may  at  any  time  be  employed,  as  the  convenience  or  in 
clinations  of  the  parties  may  suggest.  In  retail  transactions, 
nothing  yet  known  can  be  preferable  to  coins  of  silver  or  gold. 
In  small  transactions,  as  well  as  in  the  balances  which  accrue  in 
large  business,  it  is  frequently  necessary  to  use  a  medium  which 
is  at  the  same  time  an  actual  equivalent.  The  business  of  the 
world  is  so  much  increased  under  the  impulses  and  facilities  of 
the  credit  system,  that  full  employment  for  the  precious  metals 
is  found  in  the  payment  of  the  fractions.  The  credit  system 
pays  the  millions,  the  thousands,  and  the  hundreds ;  gold  and 
silver  is  employed  to  pay  the  tens,  and  fives,  and  ones.  In  many 
parts  of  the  United  States  only  the  fractions  under  one  dollar 
are  paid  in  coins.  It  is  a  matter,  certainly,  in  which  people 
may  make  their  choice.  In  the  United  States,  the  people  follow 
their  own  inclinations :  there  is  a  different  law,  on  the  subject 
of  banking,  in  almost  every  State.  The  Constitution  of  the 
United  States  prohibits  anything  but  gold  and  silver  coin  being 
made  a  legal  tender  in  payment  of  debts :  yet,  with  this  legal 
right  to  demand  gold  or  silver  coins,  not  one  hundred  dollars  in 
one  million  of  the  debts  over  fifty  dollars  are  ever  paid  or 
exacted  in  coin.  The  people  prefer  the  adjustments  of  the 
credit  system.  In  New  England,  in  New  York,  New  Jersey,  Dela 
ware,  and  many  other  States,  they  employ  notes  of  denomination 
as  low  as  one  dollar.  The  saving  in  this  is  very  great.  The 
expediency  is  a  separate  question.  It  is  safe  and  proper  to  do 


EVIL    OF    BLENDING    CREDIT    WITH    MONEY.       197 

so  probably  just  in  proportion  to  the  virtue,  intelligence  and 
commercial  integrity  of  the  people. 

We  have  seen  that  the  real  fund  employed  in  the  payment  of 
debts  is  that  arising  from  the  transaction  of  the  business  by 
which  the  debts  were  created.  One  circumstance  attending  this 
is  of  very  great  importance  —  the  fund  applicable  by  the  credit 
system  to  the  payments,  is  precisely  of  sufficient  amount  to  pay 
all  the  debts,  for  the  credit  and  debt  are  counterparts.  If  not 
diverted,  from  this,  its  proper  channel,  there  would  rarely  be 
any  difficulty  in  finding  means  to  pay  debts.  Individuals  might 
have  trouble,  owing  to  peculiar  circumstances,  in  meeting  pay 
ments  ;  but  a  whole  class  or  body  of  men  could  not,  unless  from 
other  causes,  because  the  fund  for  payment  could  never  be 
short,  and  interest  upon  credits  could  never  go  to  a  high  rate. 
This  suggests  that  a  distinction  should  be  made  by  law  between 
interest  on  credits  and  interest  on  money. 

The  blending  credits  and  money,  and  treating  them  mainly 
as  identical,  has  been  a  fruitful  source  of  error  and  mischief. 
This  fatal  policy  has  been  the  parent  of  more  commercial  revul 
sions  than  all  other  causes  combined ;  it  has  ruined  millions  of 
men  of  business  in  Great  Britain  and  in  the  United  States. 
The  fund  of  credits  is  really  and  properly  applicable  to  the 
payment  of  debts  of  trade  incurred  in  the  distribution  of  the 
articles  of  general  consumption  ;  that  is,  to  the  extinction  of 
both  debts  and  credits  —  a  relation  in  regard  to  each  transac 
tion  only  intended  to  be  temporary.  Any  diversion  of  credits 
from  the  legitimate  purpose  of  paying  such  debts  is  hazardous  ; 
for,  as  they  amount  to  the  same  sum  as  the  debts,  there  can 
never  be  more  than  enough.  This  credit  system  being  founded 
on  human  confidence,  is  by  its  nature,  it  is  true,  extremely 
elastic,  and  capable  of  bearing  much  abuse ;  yet,  for  the  same 
reason,  it  is  subject  to  sudden  collapse  and  utter  ruin.  Under 
our  present  system  of  credit,  a  great  amount  of  credits  and 
securities  are  annually  diverted  from  their  legitimate  purposes, 
and  employed  as  money.  This  abuse  is  met  by  a  prolongation 
of  the  time  of  adjustment ;  that  is,  further  time  of  payment  is 


198  DIVERSION    OP    CREDITS. 

given  to  those  who  are  not  prepared  to  meet  engagements. 
This  extension  of  time  is  often  liberally  granted  for  years,  but 
the  period  is  sure  to  come  when  creditors  must  realize  their 
balances :  no  further  time  can  be  given ;  the  only  alternative  is 
payment  or  bankruptcy.  Debts  are  then  often  spunged ;  or, 
rather,  a  certain  number  of  debtors  fail,  and  never  pay,  and 
the  equivalent  amount  of  credits  become  worthless. 

The  great  temptation  to  this  diversion  of  credits  arises  from 
the  fact  that,  by  our  present  system,  they  are  required  to  be 
convertible  at  will  into  gold  or  silver.  The  whole  of  the  credits 
which  are  made  active  —  that  is,  all  that  are  turned  into  bank 
notes  or  bank  deposits  —  are  required  to  be  convertible.  In 
point  of  fact  they  are  not  so  convertible,  and  they  cannot  possi 
bly  be,  as  they  amount-  at  all  times  to  a  sum  from  ten  to  twenty 
times  greater  than  any  possible  amount  of  gold  and  silver  which 
would  be  available  for  such  a  purpose.  This  legal,  but  not  real 
convertibility  of  these  credits  gives  them  the  character,  and 
makes  them  available  to  a  very  great  extent  as  money ;  it  de 
ceives  and  misleads,  without  any  equivalent  benefit.  The 
assumed  convertibility  does  not  add,  in  the  least  degree,  to  the 
efficiency  or  availability  of  the  credits  for  the  payment  of  debts, 
nor  does  it  make  such  payment  any  more  valid.  But  for  this 
pretended  convertibility,  it  would  be  difficult  to  divert  credits 
largely  from  their  true  channels ;  it  is  a  mischief  without  any 
redeeming  circumstance. 

If  it  be  alleged,  in  favor  of  this  convertibility,  that  the  pro 
missory  notes  and  bills  of  exchange  are,  by  law,  payable  at 
maturity  in  gold  or  silver ;  that  is  very  true,  it  may  be  replied, 
but  it  is  only  at  maturity,  when  no  one  ever  thinks  of  demand 
ing  gold  or  silver,  because  payment  is  just  as  acceptable  and 
valid  in  the  usual  mode.  By  the  course  to  which  we  object,  the 
whole  amount  of  these  credits  is  assumed  to  be  convertible  at 
once  and  continuously ;  they  are  thus  turned  into  a  quasi 
money,  and  applied  to  all  manner  of  purposes  to  which  money 
is  properly  applicable.  The  effect  is  the  same  as  if  promissory 
notes  and  bills  of  exchange,  whatever  be  the  time  of  maturity, 


CONVERTIBILITY.  199 

were  by  law  made  payable  at  any  moment  the  holder  might 
please  to  demand  the  amount  in  gold  or  silver. 

But  we  do  not  intend  here  to  enter  into  the  consideration  of 
the  securities  proper  to  be  exacted  from  banks  or  bankers,  who 
issue  bank-notes  to  serve  the  purposes  of  money.  We  may  dis 
cuss  that  hereafter,  and  in  its  place.1  Neither  do  we  now 
assert  that  there  is  any  better  security  for  those  who  are  the 
receivers  of  bank-notes,  than  convertibility.  What  is  now  sug 
gested  is,  that  we  carry  convertibility  too  far  when  we  attempt 
to  make  far  the  larger  portion  of  the  great  fund  of  credits  con 
vertible,  on  demand,  into  gold  or  silver.  This  fund,  which  is 
nothing  else  but  the  evidence  of  prolonged  credits  granted  in 
the  progress  of  industry,  trade  and  consumption,  and  which, 
through  the  processes  of  the  credit  system,  are  the  appropriate 
medium  for  the  discharge  of  corresponding  debts,  neither  the 
necessities  of  business,  nor  the  demands  of  convenience,  require 
to  be  convertible  on  demand  into  gold  or  silver. 

This  requirement,  as  it  operates,  is  one  of  the  most  mis 
chievous  blunders  of  modern  times.  When  two  merchants  keep 
an  account  in  their  respective  books  against  each  other,  they 
settle  these  accounts,  adjust  the  respective  debts,  and  balance 
or  extinguish  them,  without  the  idea  of  convertibility  crossing 
their  minds.  What  two  merchants  thus  do  directly  for  each 
other,  the  books  of  banks  and  bankers  do  for  the  community  of 
business  men.  On  their  books  these  men  find  themselves 
charged  with  their  debts,  against  which  they  seek  to  bring  their 
credits,  that,  meeting  on  the  same  books,  both  debts  and  credits 
may  be  alike  extinguished.  With  this  operation  convertibility 
has  little  to  do,  and  need  have  nothing.  The  mischief  of  this 
requirement  does  not  spring  from  the  law  which  makes  every 
debt  payable  in  gold  or  silver,  for  that  leaves  every  creditor  to 
accept  any  mode  of  payment  which  he  pleases :  it  is  as  absurd, 
however,  as  if  every  debtor  were  placed  under  the  impossible 

1  Considered  in  the  chapter  on  the  Bank  of  England,  and  in  that  on  the 
Banks  of  the  United  States. 


200  BOOKS    OF    ACCOUNT. 

obligation  to  keep  gold  and  silver  in  his  possession  sufficient  to 
pay,  on  demand,  every  debt  he  owed. 

In  all  ages  of  the  world  efforts,  more  or  less  successful,  have 
been  made  to  dispense  with  the  precious  metals  as  a  very  expen 
sive  medium  of  exchange.  The  success  of  these  experiments 
has  been  in  proportion  to  the  state  of  civilization,  and  the  pro 
gress  of  mercantile  morality.  It  would  lead  us  into  too  great 
detail  to  trace  the  history  of  these  efforts,  or  even  to  specify 
their  various  kinds.  We  shall  only  describe  a  few  of  these 
modes  of  payment,  such  as  are  not  only  characteristic  of  others, 
but  effective  in  themselves.  Our  object  in  this  will  be,  not  to 
give  a  general  view  of  each  topic,  but  merely  that  aspect  of  each 
which  relates  to  payments.  Many  of  these  subjects  have  various 
bearings,  very  complicated  relations,  and  diverse  points  of  view. 
Our  attention  will  be  confined  to  that  of  payments,  or  commer 
cial  liquidation.  These  topics  may  be  taken  up  in  the  following 
order: — Books  of  account,  Promissory  notes,  Bills  of  exchange, 
Bank-notes,  Bank  deposits,  and  Clearing-houses. 

$  2.     Books  of  account. 

However  numerous  the  phases  of  the  credit  system,  it  may  be 
regarded  as  having  its  best  summary  in  book-keeping.  When  two 
persons  in  business,  having  frequent  dealings  with  each  other, 
instead  of  making  payment  or  passing  an  equivalent  at  each 
transaction,  simply  debit  each  other  in  account  with  the  proper 
amount,  their  payments  are  only  deferred  to  a  future  day. 
They  have  separated  the  business  of  payment  from  the  transac 
tion  which  gave  rise  to  the  debt.  Each  receives  and  enjoys  the 
services  or  commodities  obtained  from  the  other,  as  his  wishes 
or  interests  dictate ;  and  each  is  to  make  satisfaction,  or  render 
an  equivalent,  at  a  subsequent  time.  The  main  object  in  view 
in  their  business  is,  therefore,  attained  by  both  before  any  pay 
ment  is  made. 

We  may  suppose  the  account  between  a  merchant  and  manu 
facturer  to  stand  thus,  the  debt  and  credit  being  reversed  on. 
their  respective  books  :  — 


BOOK-KEEPING    AND     PAYMENTS.  201 

The  books  of  J.  Black,  at  the  account  of  J.  White. 


H 

Date. 

Goods. 

Dollars. 

CtS. 

Date. 

Goods. 

Dollars. 

ct». 

1850,  Jan.  1 

To  mdze 

1000 

00  1850,  Jan.  5 

By  mdze 

2200 

00 

"  Feb.  2 

a 

1100  1  00  Ij  "  Feb.  6 

2100 

00 

"  Mar.  3 

« 

1200 

00  j 

"  Mar.  7 

1950 

00 

"  April  4 

ft 

. 

1300 

00  i 

"  April  8 

1800 

00 

"  May  5 

« 

1400 

00 

"  May  9 

1750 

00 

"  June  6 

a 

1500 

00 

"  June  10 

1600 

00 

'   July  7 

t( 

. 

1600 

00 

"  July  11 

1500 

oo  1 

<   Aug.  8 

(t 

1700 

00 

"  Aug.  12 

1400 

00 

'   Sept.  9 

« 

. 

1800 

00 

"  Sept.  14 

1250 

00 

'   Oct.  10 

" 

. 

1900 

00 

"  Oct.  16 

1100 

00 

'   Nov.ll 

H 

M 

2000 

00 

"  Nov.  17 

1050 

00 

'   Dec.  12 

" 

2100 

00 

"  Dec.  20 

1000 

00 

"    "  31 

To  bal.  cash 

100 

00 

18,700 

00 

18,700 

00 

1 

If  two  persons  have  dealt  thus  with  each  other  during  a  year, 
their  books  of  account  will  be  a  check  upon  each  other ;  and  if 
both  are  correct,  will  exhibit  the  same  result.  At  the  end  of  the 
year,  it  will  be  found  that  J.  Black  has,  at  various  dates,  sold 
goods  to  J.  White  to  the  total  amount  of  $18,600  ;  and  that  J. 
White  has  sold  goods,  during  the  same  time,  to  J.  Black  to  the 
total  amount  of  $18, TOO.  Each  of  these  parties  thus  received 
large  quantities  of  goods  of  great  value  from  the  other,  without 
any  payment.  The  books  are  the  evidence  of  the  transaction, 
and  express,  in  money  of  account,  the  value  of  the  goods,  or  the 
amount  of  the  mutual  indebtedness.  When  these  parties  meet 
at  the  end  of  the  year,  for  the  settlement  of  their  accounts,  they 
have  but  to  strike  a  balance,  which  shows  that  J.  Black  has  to 
pay  to  J.  White  $100 ;  and  this  being  done,  the  whole  indebted 
ness  of  $18,600  on  one  side,  and  $18,700  on  the  other,  is  fully 
discharged  and  paid.  The  goods  delivered  by  the  one  have 
paid  for  the  goods  delivered  by  the  other.  The  $18,600  thus 
paid  by  each  of  the  parties  is  as  effectual,  satisfactory  and 
legal  as  the  payment  of  the  balance  of  $100  in  coins  by  J. 
Black.  Transactions  of  this  kind  are  of  constant  occurrence  in 
all  civilized  countries.  It  cannot  be  alleged,  with  any  pretence 
of  reason,  that  the  business  thus  carried  on  could  have  been  any 
better  done,  if  each  delivery  of  goods  had  been  paid  for  at  the 


202  PAYMENTS    BY    ADJUSTMENT. 

time  in  coins.  This  would  have  involved  the  necessity  of  obtain 
ing  and  keeping  on  hand,  during  all  the  year,  a  considerable 
sum  in  coins. 

If  we  suppose  that,  at  the  time  of  the  adjustment  of  this 
account,  each  party  had  refused  to  accept  of  any  payment  but 
gold  and  silver,  the  only  legal  tender  in  payment  of  debts,  it 
would  have  required  $87,300  in  coins  to  have  paid  off  the  two 
debts ;  or  if  the  parties  could  have  so  far  favored  each  other, 
as  that  one  should  pay  first,  then  the  one  who  came  prepared 
might  at  once  pay  over  to  the  other  $18,600,  and  immediately 
receive  it  back. 

It  is  obvious  enough  that  there  can  be  no  advantage  in  one 
mode  of  payment  over  another,  so  that  the  party  paid  is  fully 
satisfied.  Every  payment  in  coin  involves  an  outlay  of  equiva 
lent  amount  to  obtain  the  quantity  necessary.  The  parties  to 
the  account  above  stated,  if  their  sales  had  been  made  in  coin  as 
they  proceeded,  would  have  been  obliged  to  part  with  many 
thousand  dollars  worth  of  their  goods  in  the  beginning,  to  obtain 
the  medium  of  exchange  necessary  to  carry  on  their  subsequent 
business.  This  expensive  medium  is  saved  in  all  cases  where  it 
is  practicable  to  effect  payments  by  the  simple  but  sure  process 
of  setting  off  debts  against  debts,  and  of  making  commodities 
sold  pay  for  commodities  bought. 

The  same  mode  of  adjustment  is  equally  applicable  where  the 
articles  sold  and  entered  in  account  are  coins  or  bullion.  And 
so  of  any  other  indebtedness,  whether  incurred  at  the  time  of 
the  charge,  or  whether  of  debts  existing  before  in  the  same,  or 
any  other  form. 

What  is  thus  stated  of  two  persons  keeping  mutual  accounts 
is  equally  true  of  three  or  more ;  their  accounts,  when  pro 
perly  made  up  and  balanced,  display  at  once  the  real  state 
of  their  mutual  indebtedness ;  and  each  one  will  be  willing  to 
surrender  his  claims  upon  others  for  a  similar  discharge  of  his 
own  debts. 

To  carry  the  supposition  to  an  extreme  for  the  sake  of  illus 
tration,  each  of  two  parties  may  purchase  or  assume  all  the 
debts  of  the  other  to  all  persons,  and  charge  these  assumptions 


'EXTENSION   or  THESE  METHODS.  203 

in  their  respective  accounts.  The  whole  indebtedness  thus 
mutually  incurred  can  be  extinguished  by  the  simple  process  of 
set-off,  except  the  balance,  which  may  be  in  favor  of  one  or  the 
other. 

It  is  very  obvious  that  the  usefulness  of  book-keeping,  as  a 
mode  of  extinguishing  indebtedness,  has  never  reached  its  prac 
tical  limits.  In  theory  all  the  debts  of  commerce  may  be  thus 
set-off  or  paid,  because  the  debts  and  credits  are  exactly  equal, 
and  of  course  would  balance  each  other.  But  if  such  a  general 
balance  be  impracticable,  by  reason  of  the  complications  it  in 
volves,  it  is  no  objection  to  employing  this  agency  to  its  utmost 
proper  limit  as  the  cheapest  and  safest  mode  of  payment  ever 
devised.  It  is  the  chief  object  of  every  man  of  business  who 
avails  himself  largely  of  credit,  to  apply  the  credits  he  gives  to 
the  payment  or  extinguishment  of  those  he  takes.  He  would 
desire  nothing  better  than  to  be  charged,  in  books  of  account, 
with  every  debt  he  owes,  if,  in  the  same  books,  he  could  have 
credit  for  the  debts  or  sums  due  to  him.  If  all  business  men  of 
a  particular  locality  were  to  keep  their  accounts  in  one  set  of 
books,  every  man  would  be  thus  debited  and  credited,  and  only 
their  balances  would  remain  to  be  paid.  It  is  certainly  desirable 
that  an  agency  so  effective  and  safe  should  be  carried  to  a  wider 
range  of  operation  than  has  yet  been  attempted. 

This  subject  deserves  the  more  attention,,  as  many  of  the  pro 
cesses  and  devices  of  the  credit  system  derive  their  chief  efficacy 
and  advantage  from  the  simple  methods  of  book-keeping.  The 
man  of  trade  who  asks  a  bank  to  discount  for  him  the  notes  he 
has  taken  in  business,  and  give  him  credit  for  the  proceeds  on 
its  books,  and  who  applies  the  credits  thus  obtained  to  pay  the 
notes  he  has  given  to  others  which  are  presented  to  him  for  pay 
ment  by  the  same  bank,  has  merely  availed  himself  of  the  books 
of  the  bank,  on  which  he  is  charged  with  his  debts  due  to  others, 
and  credited  with  the  debts  of  others  payable  to  him. 

What  proportion  of  the  whole  payments  of  the  credit  system 
is  made  in  this  way  cannot  be  estimated,  nor  even  approximated. 
But  it  may  be  said  that,  in  one  aspect  of  the  business,  the  whole 
operation  of  the  credit  system  may  be  resolved  into  the  methods 


204  RESULTS    OF    THE    CREDIT    SYSTEM/ 

of  book-keeping.  The  grand  result  of  the  system,  so  far  as  the 
payments  of  trade  are  effected  by  it,  is  that  the  products  of  in 
dustry,  and  the  services  and  labor  of  men,  are  exchanged  at 
prices  expressed  in  money  of  account ;  and  what  men  thus  give 
or  deliver  is  made  to  pay  fdr  what  they  receive.  Whatever  the 
complications  which  intervene,  or  whatever  the  machinery  em 
ployed,  it  is  all  resolvable  into  an  adjustment  of  accounts.  It 
would  shed  a  flood  of  light  on  the  whole  movements  of  the  credit 
system,  if  some  one  would  trace  out  and  exhibit  distinctly  the 
agency  of  book  accounts  in  accomplishing  that  vast  sum  of  pay 
ments  which  are.  effected  without  resorting  to  either  coins  or 
bullion.  Every  bank,  banker,  broker,  and  other  agent  in  the 
business  of  payments,  must  rely  on  books  of  account  to  keep  up 
the  progress  of  the  business,  and  insure  accuracy.  Books  of 
account  intervene,  therefore,  in  every  step  of  the  great  process 
of  adjustment,  by  which  the  chief  payments  of  trade  are 
effected. 


CHAPTER    VIII. 

2  1.  Promissory  notes  and  bills  of  exchange,  their  nature  and  efficiency  as 
instruments  of  payment  —  As  evidences  of  debt,  they  aid  in  separating  the 
business  of  trade  from  that  of  payments — Negotiation  of  in  payments  — 
Dealers  in  exchange  —  Bankers  —  Concentration  of  debts  and  credits  — • 
Balances  —  Use  of  notes  and  bills  in  Lancashire,  England,  and  in  the 
United  States  —  Limits  of  their  use  in  payments  —  Mutual  debts  and 
set-off. 

A  HIGH  antiquity  is  claimed  for  the  use  of  bills  of  exchange : 
though  many  authorities  ascribe  their  invention  to  the  Jews, 
who  were  expelled  from  France  in  the  years  640  and  1181,  and 
who,  taking  refuge  in  Lombardy,  were  afterwards  called  Lom 
bards.  It  is  very  safe  to  assign  them  an  ancient  date,  as  their 
use  is  so  obvious  among  merchants,  that  we  can  scarcely  ima 
gine  how  such  a  device  could  be  overlooked  among  men  in  trade 
who  had  learned  the  art  of  writing. 

Any  promise  to  pay  in  writing  is  a  promissory  note ;  and  any 
direction  in  writing  to  another  to  pay  a  sum  for  the  writer  is  a 
bill  of  exchange.  A  minute  history  of  these  forms  of  security 
might  be  very  interesting ;  but  our  object  is  merely  to  show 
their  nature,  use  and  efficiency,  rather  than  to  recount  their  his 
tory — a  task  which  belongs  to  the  annals  of  commerce.  For  pre 
sent  purposes  they  may  be  considered  together,  distinguishing, 
as  we  proceed,  their  different  operation. 

Promissory  notes  and  bills  of  exchange  are  a  part  of  that  sys 
tem  by  which  the  payments  of  trade  are  separated,  both  in  time 
and  operation,  from  the  trade  in  which  they  originate.  They 
are  evidences  of  the  debt  consequent  upon  the  transactions 
which  gave  rise  to  them.  Their  day  of  payment  is  appointed 
on  their  face ;  and  they  move  in  the  channels  which  conduct 
them  to  that  mode  of  liquidation  selected  by  the  parties  owning 

(205) 


206  FOREIGN    EXCHANGE. 

them.  Their  utility  is  not  confined  to  postponing  the  day  of 
payment,  and  affording  time  for  arrangement ;  they  may  per 
form  an  intermediate  office.  The  seller  of  goods  for  a  thousand 
dollars,  who  takes  therefor  a  bill  or  note  payable  in  three 
months,  can  only  realize  the  money  at  maturity  of  the  paper ; 
but  he  can  at  once  purchase  commodities  to  that  amount,  and 
transfer  the  bill  or  note  in  payment.  He  may  thus,  by  the  in 
tervention  of  the  paper,  exchange  goods  to  the  amount  of  a 
thousand  dollars  for  goods  to  that  amount ;  that  is,  the  goods 
sold  will  become  the  payment  for  the  goods  purchased.  One 
man  of  business  may  say  to  another,  "  I  have  sold  to  A.  B. 
goods  to  the  value  of  a  thousand  dollars ;  I  will  order  him  to 
pay  you  that  amount  in  discharge  of  what  I  now  purchase  from 
you;"  and  that  order  in  writing  would  be  a  bill  of  exchange: 
or,  he  may  say,  "  I  will  give  you,  in  payment,  a  written  pro 
mise  to  pay  which  I  took  from  him,  and  which  I  will  direct  him 
to  pay  to  you;"  and  that  would  be  negotiating  a  promissory 
note,  an  act  equivalent  to  drawing  a  bill  of  exchange,  for  the 
negotiator  or  indorser  thereby  orders  his  debtor  to  pay  the 
amount  of  the  debt  to  another.  Promissory  notes  and  bills  of 
exchange  are  thus  employed  to  purchase  commodities,  to  be  again 
sold  for  other  notes  and  bills,  which  are  in  their  turn  employed 
to  purchase  other  commodities.  It  is  mainly  by  the  primary 
agency  of  bills  of  exchange  and  promissory  notes  that  the  whole 
mass  of  goods  in  commerce  are  collected,  transported,. bought 
and  sold,  and  finally  distributed  to  the  ultimate  consumers  with 
very  little  intervention  of  money  in  the  shape  of  coins,  except 
for  the  merest  retail  operations.  This  movement  owes  some  of 
its  power  and  efficiency  to  the  circulation  of  these  bills  and 
notes  in  actual  payment.  For  he  who  has  received  such  pay 
ment,  and  with  that  paper  purchases  what  he  requires,  has  only 
done  what  he  would  have  done  with  the  money :  he  has  ex 
changed  the  goods  he  had  for  those  he  wanted.  The  same  end 
is  in  view,  and  the  same  end  is  thus  attained,  whether  the  inter 
vening  medium  be  money,  or  individual  promises  to  pay.  The 
natural  progress  of  this  negotiation  would  be  to  concentrate  the 
paper  thus  issued  for  goods  in  the  hands  of  the  large  dealers, 


EXCHANGE    AS    A    MODE     OF     PAYMENT.  207 

who-  either  become  virtually  private   bankers,   or  have   large 
operations  with  those  in  that  business. 

The  common  mode  of  employing  bills  of  exchange  and  pro 
missory  notes,  in  commercial  places  where  there  are  no  public 
banks,  is  by  intervention  of  private  bankers  and  dealers  in  ex 
change.  These  become  purchasers  and  depositors  of  nearly  all 
the  individual  engagements  to  pay  money  in  circulati-on.  If,  for 
the  sake  of  clearness,  we  suppose  that  in  any  such  community 
all  this  paper  had  fallen  into  the  hands  of  two  such  bankers  or 
dealers,  they  would  between  them  hold  claims  upon  all  who  had 
issued  such  paper ;  that  is,  all  who  had  to  pay  money  on  such 
liabilities  would  have  to  pay  it  to  one  or  the  other  of  these 
dealers  in  paper,  or  to  both  of  them.  All  these  payers  would  be 
also  receivers ;  and  they  would  not  only  pay  as  above,  but 
receive  through  the  same  two  agents  of  exchange.  Such  payers 
and  receivers  being  the  business  men,  are  debtors  and  creditors 
among  themselves :  all  the  money  they  owe  is  payable  among 
themselves,  all  the  debts  being  the  equivalent  and  counterpart 
of  all  the  credits.  The  bankers  would  soon  reduce  the  whole 
liabilities  and  credits  of  their  customers  to  an  account  between 
themselves  and  the  balances  due  their  customers.  The  debts 
and  credits  of  each  individual  in  trade,  so  far  as  these  had 
taken  the  shape  of  bills  payable,  would  be  brought  face  to  face 
in  their  books  of  account,  and  there  balanced.  If  these  private 
bankers  enjoyed,  in  an  equal  degree,  the  public  patronage,  their 
books  would  not  be  wide  of  an  even  balance.  They  would,  in 
fact,  have  assumed  the  payment  of  all  their  customers'  debts,  in 
consideration  of  having  assigned  to  them  all  their  customers' 
credits ;  which  they  could  safely  do,  because  credits  and  debts 
exactly  correspond.  The  transfer  of  the  whole  of  the  credits 
absolutely  to  one  man  would,  in  its  effects,  work  a  total  extinc 
tion  of  the  whole :  the  transfer  of  the  whole  to  two  would  only 
require  an  adjustment  to  be  made  between  the  two  according  to 
the  amounts  they  had  respectively  received.  This  discharge  of 
the  whole  of  the  debts,  by  their  meeting  in  the  same  hands 
with  the  whole  of  the  credits,  does  not  so  close  the  matter  as  to 
leave  nothing  further  to  be  done.  If  every  man  in  trade  owes, 


208  EXCHANGES    USED    FOR    AGES. 

in  notes  and  bills,  precisely  the  same  sum  which  is  owing  to  him 
in  the  same  manner,  then  the  meeting  of  all  the  debts  arid 
credits  in  the  same  hands  would  be  an  absolute  and  final  dis 
charge  of  the  whole.  But  as  most  men  in  trade  make  a  balance 
on  their  bills  payable  and  receivable,  favorable  or  unfavorable, 
these  balances  only  remain  to  be  adjusted  :  that  is,  each  indi 
vidual  must  receive  what  is  coming  to  him  on  his  bills  receivable 
more  than  he  has  to  pay  on  his  bills  payable ;  and  each  one 
must  pay  what  he  is  indebted  over  the  amount  of  his  bills 
receivable.  The  sum  of  these  balances  is  known  to  be  small : 
men's  profits,  on  the  average,  bear  a  small  proportion  to  the 
whole  amount  of  their  transactions. 

It  was  better  understood  centuries  past  than  it  is  now,  that 
by  such  means  payments  to  a  vast  amount  could  be  effected ; 
better  understood,  because  the  complications  of  trade  were  fewer 
then  than  at  present,  and  the  whole  operation  of  the  adjustment 
could  be  distinctly  traced  and  comprehended  by  those  conversant 
with  business.  This  mode  of  liquidation  has  been  practised  for 
ages,  not  only  where  greater  facilities  were  wanting,  but  in 
Venice,  Genoa,  Lyons,  and  Amsterdam,  where  great  facilities 
were  enjoyed,  because  it  was  not  only  consistent  with  the  pro 
cesses  of  the  great  banks  and  the  fairs,  but  could  aid  their  opera 
tion,  and  receive  aid  from  them.  This  mode  is  not  less  efficient 
at  the  present  day,  as  we  shall  have  occasion  hereafter  to 
notice. 

Very  much  the  largest  proportion  in  value  of  the  transactions 
of  trade,  domestic  and  foreign,  is  carried  on  by  the  issue  of  pro 
missory  notes  and  bills  of  exchange.  These  securities  are  thug 
used  to  postpone  the  time  of  payment,  to  serve  as  evidence  of 
indebtedness,  and  to  operate  as  a  medium  of  payment.  As 
every  negotiation  of  such  notes  or  bills  effects  a  payment,  their 
circulation  measures  the  amount  of  the  payments  accomplished. 
In  the  manufacturing  districts  of  England,  especially  in  Lanca 
shire,  enormous  sums  are  annually  paid  by  this  kind  of  circula 
tion.  Long  lists  of  names,  besides  those  on  the  back,  are  fre 
quently  appended  to  notes  and  bills  there,  which  show  they  have 
paid  a  debt  for  every  name. 


CIRCULATION    OF    BILLS    OF    EXCHANGE.       209 

The  promissory  notes,  after  performing  their  round  of  pay 
ments,  and  effecting  a  proportionable  transfer  and  exchange  of 
goods,  are  finally  discharged  by  bank-notes,  or  checks  on  the 
books  of  a  bank,  or  on  the  books  of  individual  merchants.  The 
domestic  bills  of  exchange  thus  used  in  Lancashire,  after  under 
going  this  circulation,  are  sent  to  London,  where  they  are  pay 
able,  and  are  there  extinguished  or  discharged  in  some  of  the 
banks  of  that  city.  It  is  not  our  purpose  to  point  out  here 
more  than  the  use  which  is  made  of  these  securities  before  they 
mature.  Their  discharge  or  payment  at  maturity  will  be  con 
sidered  under  another  head.  The  sum  of  the  exchanges  of  goods 
effected  by  this  kind  of  circulation  in  England  has  been  so  great 
as  to  have  attracted  special  attention  and  Parliamentary  in 
quiry.1  In  this  country  this  mode  of  payment  is  more  or  less 
employed  throughout  its  whole  extent ;  but  in  no  part  to  such 
an  extent  as  in  England.  The  law,  process  and  effect  of  this 
kind  of  circulation  is  nearly  identical  here  and  there.  Un 
doubtedly,  a  large  amount  of  goods  change  hands  by  this  mode 
of  payment  every  year ;  but  in  a  widely-scattered  population 
like  ours,  a  limit  to  this  mode  of  payment  is  soon  encountered 
in  a  want  of  mutual  knowledge  and  confidence.  It  is  thus  that 
a  much  larger  proportion  of  bank-notes  is  used  here  than  in 
England.  We  cannot,  of  course,  even  conjecture  the  sum  of 
the  exchanges  of  goods  effected  in  the  United  States  by  the 

1  One  of  the  witnesses  before  a  Parliamentary  committee,  in  May,  1826, 
testified  that  bills  of  exchange  on  London,  at  60  days  were  the  principal 
part  of  the  circulating  medium  in  Lancashire.  They  were  issued  to  as  low 
an  amount  as  £5.  They  circulated  from  hand  to  hand  in  payment,  being 
indorsed  by  each  party  paying  them.  A  witness  being  asked  if  he  had 
seen  these  bills  of  exchange  as  low  as  £10,  with  50  or  60  names  upon 
them,  he  replied :  —  "  Yes,  with  twice  that  number.  I  have  seen  slips  of 
paper  attached  to  a  bill  as  long  as  a  sheet  of  paper,  and  when  that  was 
filled,  another  attached  to  that." 

Another  testified  before  the  same  committee,  that  the  bills  between  £10 
and  £30  constituted  four-fifths  of  the  circulation ;  but  that  the  proportion 
of  the  whole  of  the  bills  of  all  amounts  to  the  circulation  of  bank-notes  and 
coin  was  20  to  1.  Some  bankers  estimated  that  proportion  as  high  as  50 
to  1. — Report  of  the  Lords'  Committee  on  Promissory  Notes,  &c.,  printed 
May  2Qth,  1826,  pages  183  and  180. 
14 


210  BANKING    AND    PROMISSORY    NOTES. 

negotiation  of  bills  or  notes.  It  is  one  of  the  great  elements  of 
commercial  adjustment.  The  payment  or  extinguishment  of 
these  bills  here,  as  in  England,  is  effected  generally  in  the 
banks,  or  through  facilities  furnished  by  banks. 

But  however  awkward  and  inconvenient  promissory  notes  and 
bills  of  exchange  as  a  medium  of  payment,  when  employed  speci 
fically  for  that  purpose,  they  are  susceptible  of  being  so  managed 
as  to  be  converted  into  one  of  the  most  convenient,  rapid  and 
effective  modes  of  payment  yet  discovered.  A  man  of  business 
may  be  the  holder,  for  instance,  of  $50,000  of  such  paper  in 
twenty  different  sums,  from  $595  to  $9595.  He  may  be  able 
to  employ  these  notes,  to  some  extent,  in  his  large  transactions, 
but  meets  constant  obstacles  in  the  amounts  which  do  not  suit, 
and  in  the  names  of  drawers  and  indorsers  which  may  not  be 
sufficiently  known.  If  he  carries  these  notes  to  a  banker  of 
good  standing,  and  obtains  a  credit  on  his  books  for  the  whole 
sum  less  the  interest,  with,  the  privilege  of  drawing  checks  for 
the  amount  at  his  pleasure,  it  is  manifest  that  he  can  have 
nothing  more  convenient  nor  effective  for  the  payment  of  his 
notes  as  they  mature,  or  the  making  any  needful  purchases  for 
continuance  of  his  business.  His  twenty  notes  are,  by  this  pro 
cess,  melted  into  one  fund,  which  will  flow  out  at  his  own  order, 
slowly  or  rapidly,  as  he  may  require. 

What  the  bankers  do  for  one  man,  they  do  for  a  whole  com 
munity  of  business  men.  Their  books  become  a  vast  reservoir 
of  such  funds,  upon  which  the  owners  draw  as  they  have  occa 
sion.  These  reservoirs  of  funds  really  represent  an  amount  for 
which  commodities  have  been  sold ;  the  transactions  have  taken 
place ;  the  promissory  notes  are  both  evidence  of  the  transac 
tions,  and  securities  for  the  amount  of  the  sales.  As  men  of 
business  give  notes  as  well  as  take  them,  and  as  vastly  the 
largest  proportion  of  the  business  paper  actually  represents  a 
mutual  indebtedness,  the  great  office  of  this  fund  is  to  enable 
the  parties  to  pay  and  extinguish  their  mutual  debts.  If  one 
has  converted  his  notes  into  a  credit,  at  his  banker's,  of  $50,000, 
and  owes  $40,000,  it  merely  reduces  his  credit  to  $10,000  to 
pay  off  his  debts.  This  is  not  only  the  best  use  to  make  of  his 


THE    CREDIT    SYSTEM    AND    ITS    FUND.  211 

credit,  but  it  is  indispensable  to  the  progress  of  business.  The 
transactions  of  business  proceed  as  this  indebtedness  is  created ; 
the  purchases,  sales,  the  production,  distribution  and  consump 
tion  involved,  all  go  on  under  the  facilities  of  the  credit  system, 
in  the  business  to  which  we  refer,  by  the  issue  of  the  paper  of 
the  parties.  The  payment  of  this  paper  is  effected  by  a  series 
of  subsequent  transactions,  as  a  separate  business.  The  chief 
facility  by  which  this  payment  is  accomplished  arises  from  the 
fact  that  the  debt  is  mutual.  In  every  million,  about  nine  hun 
dred  thousand  is  strictly  mutual,  and  is  susceptible,  therefore, 
of  ultimate  payment  by  being  balanced  on  the  books  of  the 
bankers.  The  mode  in  which  the  balancing  process  is  effected 
is  very  obvious,  but  will  be  specially  explained  under  the  heads 
of  bank  deposits  and  clearing  houses.  If  one  man  is  the  holder 
of  more  of  the  paper  of  others  than  he  has  issued  to  others, 
another  has  issued  a  greater  amount  than  he  holds ;  and  of  all 
this  variety,  the  credits  of  the  parties  at  their  bankers  is  a  true 
reflection.  These  credits  become,  then,  the  expression,  in 
money  of  account,  of  what  has  taken  place  and  is  going  on  in 
the  channels  of  business  in  which  commodities  destined  to  con 
sumption  travel. 

The  great  fund  out  of  which  the  payments  of  trade  or  busi 
ness  is  made  is  the  credits  granted  upon  the  business  or  com 
mercial  paper.  This  fund  represents  commodities  sold  and  to 
be  paid  for ;  the  parties  who  transact  the  business  out  of  which 
the  fund  arises  are  both  creditors  and  debtors.  They  are  not 
only  willing,  but  it  is  their  interest  to  apply  their  credits  to  ex 
tinguish  or  pay  their  debts.  No  creditor  can  ask  any  more 
effective  payment  to  himself  than  that  which  enables  him  to  pay 
his  own  debts.  If  a  thousand  men  in  one  district  have  to  their 
credit  a  million,  it  is  probable  they  will  owe  among  themselves 
nine  hundred  thousand :  this  sum  can  be  fully  and  satisfactorily 
paid  by  the  application  of  this  amount  in  the  credits.  Their 
credit  of  a  million  will  be  reduced  to  one  hundred  thousand,  and 
their  whole  debts  as  between  each  other  will  have  been  dis 
charged.  This  payment  is  of  the  same  nature,  though  made 
circuitously,  as  that  which  is  made  directly  between  two  men 


212  FOREIGN    EXCHANGE. 

who,  having  mutual  transactions  entered  on  their  books  of 
account,  meet,  and,  so  far  as  the  indebtedness  is  mutual,  dis 
charge  it  by  a  balance. 

In  a  civilized  community,  the  obligation  of  a  man  to  pay  his 
debts  is  so  sacred  and  so  pressing,  that  he  can  desire  no  better 
medium  of  payment  of  that  which  others  owe  to  him,  than  that 
which  will  serve  to  pay  his  own  debts. 

$  2.  Foreign  exchange  as  a  means  of  payment —  Complicated  formerly  with 
coinage  and  its  evils  —  Now  with  increased  transactions  of  domestic  trade 
—  Tlie  processes  of  foreign  trade  and  payments  readily  perceived  — 
Imports  —  Exports  —  Dealers  in  exchange  and  bankers  —  Payments  may 
be  made  in  either  country  —  Rate  of  exchange  —  Trade  with  all  nations  — 
Circuitous  exchange  as  effective  as  direct  —  Fluctuations  in  exchange  — 
Ttie  economy  of  this  mode  of  payment  increases  trade. 

The  operation  of  the  exchange  between  any  two  or  more 
countries,  having  a  mutual  commerce,  is  effective  in  accomplish 
ing  a  very  large  portion  of  the  payments  of  that  commerce.  In 
reference  to  foreign  trade,  nations  may  be  taken  separately, 
and  each  nation  spoken  of  as  debtor  for  all  that  its  people  have 
imported,  and  creditor  for  all  that  has  been  exported.  The 
business  transactions  of  any  country  which  lead  to  the  exporta 
tion  of  commodities,  are  settled  and  adjusted  at  home ;  so,  also, 
of  transactions  in  foreign  goods  after  they  arrive ;  but  there 
remains  to  be  adjusted  or  paid  the  debts  and  credits  arising 
between  importers  and  exporters  of  the  respective  countries 
engaged  in  mutual  trade,  together  with  the  debts  and  credits 
arising  between  the  respective  importers  and  exporters,  and  the 
persons  from  whom  they  purchase  and  to  whom  they  sell. 
Upon  debts  and  credits  in  this  posture,  foreign  exchange  is 
brought  to  bear  as  a  mode  of  adjustment.  The  exchange  of 
commodities  first  takes  place,  prices  and  amounts  are  adjusted, 
and  then  comes  the  affair  of  payment  as  a  separate  business  in 
the  hands  of  different  parties,  who  are  devoted  to  it  as  an  occu 
pation. 

Foreign  exchange  has  been  long,  and  is  even  now  by  not  a 
few,  considered  a  most  complicated  and  perplexed  subject,  level 


FOREIGN    EXCHANGE.  213 

only  to  the  comprehension  of  merchants  of  great  shrewdness 
and  special  experience.  It  was,  in  former  times,  mixed  up  with 
many  difficult  problems  of  coinage ;  with  numerous  complex 
questions  arising  out  of  the  various  debasements  of  coins  and 
currency,  which  made  it  impossible  for  many  to  understand  its 
mysteries,  and  possible  for  only  a  very  few  to  master  its  details. 
The  days  of  debasement  being  pretty  well  spent,  the  subject  of 
foreign  exchange  need  not  now  be  regarded  as  so  unintelligible 
and  forbidding. 

It  is  not  certainly  so  very  hard  to  conceive  of  all  the  debts 
owing  by  persons  in  one  country  to  persons  in  another,  and  to 
persons  in  all  other  countries,  as  being  collectively  a  sum  owing 
by  one  country  to  another,  or  to  all  other  countries.  In  this 
view,  every  commercial  country  may  be  regarded  as  being  in 
debted  to  each  country  with  which  it-  trades  for  all  it  has 
imported  from  each.  This  debt  for  imports  is  mutual  to  the 
extent  of  the  trade  of  each  with  the  other.  Looking  at  the 
foreign  trade  of  each  country  apart  from  its  details  and  as  a 
whole,  it  is  much  more  simple  and  easy  of  comprehension  than 
the  domestic,  which  is  more  difficult  to  examine  in  the  mass, 
and  to  separate  from  its  details.  The  whole  process  of  foreign 
and  domestic  trade  is,  in  fact,  perfectly  alike ;  for  if  the  trouble 
were  taken  thoroughly  to  analyze  the  home  trade,  it  would  be 
found  to  consist  of  a  series  of  exports  and  imports  from  distinct 
regions  or  districts,  of  which  every  one  may  be  compared  to  a 
separate  nation.  The  small  states  of  Germany,  which  carry  on 
a  foreign  trade  with  each  other  and  the  world,  are  many  of  them 
no  larger  than  counties  in  Pennsylvania.  The  domestic  bills 
and  other  devices  by  which  the  payments  of  home  trade  are 
effected,  perform  the  same  office  which  is  assigned  to  foreign 
bills  in  reference  to  that  trade.  In  our  relations  with  foreign 
countries,  we  have  the  advantage  of  well-defined  boundaries, 
and  of  the  custom-house  and  shipping  regulations,  to  exhibit  the 
amount  and  value  of  the  trade ;  also  of  the  fact  that  foreign 
payments  concentrate  largely  in  agencies  separate  from  those 
in  which  our  domestic  payments  are  made.  It  is  much  easier, 
therefore,  to  ascertain  the  amount  of  our  foreign  than  of  our 


214         EXPORTS  PAY  FOE  IMPORTS. 

domestic  payments.  Besides,  the  former  bear  hardly  a  com 
parison  in  amount  with  the  latter.  There  is,  therefore,  apart 
from  coinage  and  its  incidents,  comparatively  little  difficulty  in 
this  subject  of  foreign  exchange. 

In  the  foreign  trade  there  are  two  distinct  classes  of  persons 
whose  movements,  with  those  of  their  various  agencies,  make  up 
the  operations  of  the  foreign  exchange.  There  are  those  who 
have  exported  goods  or  sent  them  out  of  the  country,  and  who 
are  entitled  to  payment  from  abroad ;  and  those  who  have  im 
ported  goods,  or  brought  them  into  the  country,  and  who  must 
make  payment  abroad.  If  no  device  of  economy,  or  expedient 
of  convenience  were  resorted  to  in  making  these  payments,  the 
debtors  abroad  and  the  debtors  at  home  would  be  obliged  to 
transmit,  from  their  respective  countries  to  the  countries  of  their 
respective  creditors,  the  aggregate  sums  equivalent  to  the  whole 
foreign  trade.  This  would  afford  the  absurd  spectacle  of  a  con 
tinual  movement  of  the  precious  metals  to  effect  what  the  trade 
itself  had  effected.  It  is  very  apparent  that  the  nation  which 
has,  in  the  aggregate,  exported  to  the  value  of  a  hundred 
millions,  and  imported  to  the  value  of  ninety  millions,  has  vir 
tually  paid  for  the  imports  by  the  exports.  It  is  only  necessary 
that  those  who  owe  the  ninety  millions  for  goods  imported 
should  pay  that  sum  to  those  who  are  creditors  for  goods  ex 
ported,  and  there  would  remain  only  ten  millions  to  be  other 
wise  paid.  This  is,  in  fact,  the  process.  A  class  of  dealers  in 
exchange,  who  combine  this  business  often  with  that  of  banker, 
broker  or  merchant,  become  purchasers  of  the  bills  drawn  by 
the  exporters  of  goods  for  the  proceeds,  and  the  same  class 
become  sellers  of  bills  to  those  who,  having  imported  goods,. 
have  remittances  to  make  for  them.  If  the  amount  exported  is 
an  hundred  millions,  bills  to  that  extent  may  be  drawn  and  pur 
chased  by  these  dealers ;  and  if  imports  to  the  amount  of  ninety 
millions  have  been  made,  the  dealers  can  sell  exchange  to  that 
amount ;  and  by  this  means  a  hundred  and  eighty  millions  of 
the  payments  arising  out  of  this  foreign  commerce  will  be 
effected :  that  is,  ninety  millions'  worth  of  goods  exported  will 
have  been  set  off  against  ninety  millions'  worth  imported.  The 


THE    MODE    OF    ADJUSTMENT.  215 

main  instruments  of  this  payment  or  adjustment  are  bills  of  ex 
change  between  the  parties  engaged  in  the  trade ;  these  bills 
pass  into  the  hands  of  those  whose  business  it  is  to  deal  in  them, 
and  who,  by  keeping  an  open  credit  abroad,  are  always  prepared 
to  draw  for  sums  to  suit  purchasers.  Thus  the  amount  due  from 
individuals  in  another  country  becomes  a  fund  upon  which  bills 
can  be  drawn,  in  sums  to  suit  those  who  have  payments  to  make 
there. 

As  the  dealers  in  exchange  have  correspondents  in  many 
countries,  it  is  of  little  moment  to  the  progress  or  the  facility  of 
the  payment  whether  the  bills  drawn  for  that  purpose  are  all 
drawn  in  one  or  the  other,  or  partly  in  both  countries :  the  main 
thing  to  be  effected  being  merely  to  balance  the  accounts  so  far 
as  equal.  This  is  a  matter  which  proceeds  wholly  by  individual 
choice  and  management.  In  our  trade  with  Europe,  the  ex 
change  business  is  chiefly  done  at  home ;  that  is,  our  exporters 
generally  sell  their  bills  at  home,  and  our  importers  make  their 
payments  by  specie  exported  or  bills  remitted.  The  market  for 
the  exchange  is,  then,  with  us ;  the  barometer  of  the" price  of 
exchange  is  on  our  side  of  the  water.  The  price  at  which  ex 
porters  can  sell  their  bills,  and  at  which  importers  must  pur 
chase  them,  is  subject  to  fluctuations  arising  from  the  supply 
and  demand,  and  from  other  causes  which  affect  prices  gene 
rally.  It  is  quite  probable  that  the  pressure  of  the  demand  is 
more  steady,  and  that  the  adequacy  of  the  supply  is  better 
known,  where  the  market  is  chiefly  on  one  side.  The  agency 
of  the  dealers  on  the  other  side  is  to  collect  the  proceeds  of  the 
bills  drawn  upon  the  exports,  and  hold  them  subject  to  the  bills 
drawn  by  dealers  in  exchange  in  the  regular  course  of  their 
business.  On  our  side  the  dealers  in  exchange,  whilst  employed 
in  purchasing  bills  for  which  they  pay  here,  are  also  engaged  in 
selling  bills  for  which  they  receive  payment  here :  on  the  other 
side  their  correspondents  receive  money  for  the  bills  remitted  to 
them,  and  pay  it  out  upon  the  bills  drawn  upon  them.  The 
operation  is  clearly,  as  stated,  a  mode  of  applying  the  goods 
sent  abroad  to  payment  for  those  brought  home. 


216  PURCHASE    AND    SALE    OF    BILLS. 

It  is  essentially  a  distinct  operation  from  the  home  payments. 
The  principle  in  both  is  the  same,  and  the  processes  may  occa 
sionally  be  the  same ;  but  they  are  not  the  same  thing.  It  is 
proper  that  those  who  export  goods  should  be  paid  for  them,  and 
that  those  who  import  should  pay  for  their  imports.  It  is  the 
same  with  those  who  buy  and  sell  at  home.  In  both  foreign 
and  domestic  trade,  goods  are  made  to  pay  for  goods  ;  but  when 
goods  are  exported,  they  have  left  the  domain  of  domestic  trade, 
and  when  goods  first  arrive,  they  have  not  yet  entered  into  the 
domestic  trade. 

Those  who  export  cotton,  flour,  and  other  commodities,  are 
drawers  of  bills  of  exchange  for  the  proceeds  of  the  sales  :  the 
importers  of  foreign  goods  are  purchasers  of  bills  for  the  cost 
of  such  goods ;  or,  if  such  goods  are  sent  over  by  the  foreign 
merchants  or  manufacturers,  then  they  are  purchasers  of  bills  to 
the  amount  of  their  sales.  The  dealings  between  these  parties, 
and  the  competition  between  bankers  and  brokers  who  are  the 
intermediate  agents  in  this  business,  govern  the  rate  of  ex 
change.  The  standard  of  coinage  in  each  is  the  basis  of  the 
rate  of  exchange  between  any  two  countries.  Between  Great 
Britain  and  the  United  States  this  basis  is  the  quantity  of  pure 
gold  which,  in  Great  Britain,  is  the  equivalent  of  the  pound 
sterling — the  unit  of  the  money  of  account  there,  and  the  quan 
tity  of  pure  gold  which  here  is  the  equivalent  of  our  dollar  of 
account ;  or,  taking  our  dollar  coin  and  the  British  sovereign  as 
the  points  of  comparison,  what  is  the  price  or  value  of  each  ex 
pressed  in  the  money  of  account  of  the  other.  If,  for  instance, 
our  dollar  is  worth  four  shillings  and  two  pence  in  England, 
and  a  sovereign  is  worth  four  dollars  and  eighty-one  cents  here, 
the  rate  of  exchange  will  be  founded  on  this  comparison,  and 
will  depend  for  its  fluctuations  upon  the  supply  of  bills  and  the 
demand  for  them,  and  upon  such  other  influences  as  affect  the 
price  of  exchange.  A  debt  in  England,  although  the  debtor 
lives  here,  is  expressed  there  in  pounds,  shillings  and  pence, 
the  English  money  of  account.  Bills  on  England  are  expressed 
in  English  money  of  account,  and  must  produce,  when  paid, 


FOREIGN    EXCHANGE    INDIRECT.  217 

the  amount  thus  expressed ;  they  are,  however,  bought  and  sold 
here  at  rates  expressed  in  our  money  of  account.1 

What  has  been  said  of  the  trade  between  one  country  and 
another,  for  the  sake  of  distinctness,  is  equally  applicable  to  the 
whole  foreign  commerce  of  any  nation.  For  by  the  same  pro 
cess  of  exchange  —  of  buying  bills  and  selling  bills  ;  of  receiving 
the  proceeds  of  bills  remitted,  and  paying  the  amount  of  bills 
drawn  —  the  exports  of  one  nation  to  all  other  nations  are  used 
to  pay  for  the  imports  of  that  nation  from  all  others.  As  the 
number  increases,  the  complication  increases ;  but  the  object — the 
principle  is  the  same,  and  the  processes  have  only  become  more 
complex.  We  can  readily  comprehend  how  the  purchaser  of 
exchange  upon  one  country  may  extend  his  business  to  the  pur 
chase  of  bills  upon  another,  or  more  countries,  or  upon  all 
countries.  The  business  of  the  dealer  in  exchange  being  thus 
extended,  he  becomes  a  seller  of  all  that  he  buys.  In  this 
country  this  dealer  may  purchase  bills  on  all  parts  of  Europe, 
and  establish  a  correspondence  in  every  city ;  or  he  may  remit 
his  bills  to  one  house  in  London,  and  supply  his  customers  with 
bills  on  London,  which  make  a  good  remittance  to  all  other 
places ;  or  he  may  establish  a  house  or  correspondence  in  Paris, 
Havre,  Hamburg,  and  Amsterdam,  and  draw  upon  all  these  or 
more  points.  The  mode  of  adjusting  all  the  payments  of  the 
foreign  trade  is  that  which  all  the  parties  concerned  adopt  as 
the  most  economical,  rapid  and  convenient.  Sometimes  payments 

1  The  mode  of  quoting  exchange  on  England  has  absurdly  continued  the 
same  since  the  act  of  Congress  of  March  2d,  1799,  regulating  the  collection 
of  duties,  which  then  fixed  the  proportion  between  the  pound  sterling  and 
the  dollar  at  $4.44  to  <£!.  This,  by  various  changes  in  the  coinage  of  the 
two  countries,  is  now  $4.84-5  to  £1 ;  but  the  mode  of  stating  the  rate  of 
exchange  continues  to  be  the  same,  and  quotes  the  bill  for  £1000,  which 
sells  for  $4845,  at  9|  per  cent,  above  par.  This  shows  how  perseveringly 
men  of  business  adhere  to  their  modes  of  computation  and  expressing 
prices,  but  in  no  way  affects  the  real  price  of  exchange.  This  absurd  cus 
tom  should  be  abandoned,  as  it  adds  to  complications,  and  tends  to  pre 
vent  the  uninitiated  from  comprehending  a  subject  which  is  of  interest 
to  all. 


218  FOREIGN    EXCHANGE    IN    PAST    TIME. 

between  particular  places  are  settled  in  one  way,  and  sometimes 
in  another.  He  who  owes  a  debt  in  Amsterdam  may  remit  a 
bill  on  London,  or  Hamburg,  or  Havre,  or  direct  as  special  in 
formation  or  circumstances  may  dictate ;  or  a  remittance  may 
pass  through  several  hands  before  it  reaches  its  destination. 
The  old  works  on  exchange  are  full  of  minute  and  curious 
expositions  on  the  subject  of  circuitous  exchange.1  They  re 
garded  skill  in  this  art  as  the  merchant's  highest  attainment. 
Its  whole  scope  was,  however,  in  not  a  few  respects,  better 
understood  centuries  ago  than  at  the  present  time.  Foreign 
exchange  was  then  comparatively  of  more  importance  than  at 
this  day,  when  the  progress  of  domestic  industry  has  magnified 
the  home  trade  of  civilized  countries  vastly  beyond  the  foreign 
in  value  and  importance.  The  business  of  the  foreign  exchange 
is  merged  now  in  other  vast  transactions,  and  in  this  way  it  may 
not  enjoy  some  facilities  formerly  accorded  to  it ;  and  it  does 
not  stand  out  so  conspicuously  as  one  of  the  great  processes  of 
commerce.  We  have  but  to  revert  to  the  mode  in  which  bills  of 
exchange  were  paid  at  the  fairs  of  Lyons,2  and  other  cities  and 
commercial  marts,  to  be  made  fully  sensible  how  well  the  subject 
of  exchange  was  understood  in  past  ages,  and  how  skilfully 
the  mode  of  adjustment  was  then  adapted  to  the  requirements  of 
commerce.  At  Novi  and  Placentia,  in  Italy,  for  a  long  period 
previous  to  the  eighteenth  century,  multitudes  of  merchants  con 
gregated  every  three  months,  for  the  mere  purpose  of  liquidating 
debts;  very  little  trade  was  carried  on  at  the  fairs  held  in 
those  places,  though  vast  sums  were  daily  discharged  by  the  pro 
cess  of  set-off.3 

Merged,  however,  as  exchange  operations  are  in  a  mass  of 
great  financial,  banking  and  commercial  transactions,  they  may 
be  separated  and  brought  very  distinctly  under  survey  by  a 
little  attention  to  the  subject.  There  is  due  to  every  country, 

1  A  curious  diagram  may  be  seen  in    "  Postlethwaite's  Dictionary  of 
Commerce,"  illustrating  the  results  of  circuitous  and  complex  operations 
in  foreign  exchange.     Art.  "Exchange." 

2  As  may  be  seen  in  the  chapter  on  "  Fairs,"  in  this  volume. 

8  "Robert's  Map  of  Commerce,"  folio;  London;  at  "Placentia." 


BALANCE-SHEET    OF    NATIONS.  219 

from  all  others,  a  certain  amount  in  the  aggregate ;  and  there  is 
due  from  each  country  to  all  others,  in  the  aggregate,  a  certain 
sum.     Whatever  may  be  the  processes  or  the  complexity  of  de 
tails  by  which  it  is  effected,  it  is  manifest  that,  by  the  use  of 
bills  of  exchange,  the  amount  which  is  owing  to  any  country 
may  be  applied  to  the  extinguishment  or  payment  of  the  debt 
due  by  that  country,  so  far  as  it  will  reach,  if  not  sufficient  to 
cover  the  whole.     The  object  is  the  same  as  in  the  direct  ex 
change  between  any  two  countries ;  it  is  that  the  merchants  of 
any  country  may  apply  the  debts  due  to  them  to  payment  of 
the  debts  due  by  them.     This  is  the  same  operation  which  is 
effected  among  individuals  by  the  working  of  bank  deposits,  or 
the  circulation  of  bank-notes ;  or  among  the  separate  districts 
of  the  same  countries  by  the  accounts  of  banks  with  each  other, 
or  by  the  mutual  accounts  and  correspondence  of  dealers  in  do 
mestic  exchange.     The  operation  to  be  performed,  in  paying 
foreign  debts,  may  be  readily  comprehended  by  supposing  that 
each  country  should  send  a  statement  of  its  claims  upon  all 
others  to  a  common  place  of  adjustment.     From  all  these  state 
ments  a  balance-sheet  could  be  framed,  showing  at  one  view  the 
debts  and  credits  of  each,  and  the  balances,  favorable  or  unfa 
vorable,  of  each.     The  whole  sum  of  the  indebtedness,  except 
these    balances,    could   of    course    be    discharged    upon    this 
balance-sheet.    As  no  such  place -of  adjustment  exists,  whatever 
mode  of  payment  comes  nearest  to  this  simple  plan  is  likely  to 
be  the  most  convenient  and  economical.     Bills  of  exchange  are 
certificates  or  evidences  of  debt,  which  fall  into  the  hands  of 
dealers  in  exchange;  and  their  offices,  books  of  account  and 
mutual  correspondence  throughout  the  world,  are  in  the  place 
of  a  clearing  house  or  office  common  to  all.     If  all  these  pay 
ments  could  be  concentrated  in  one  office,  the  whole  extent  of 
the  business  would  be  at  once  perceived  and  appreciated ;  the 
amount  of  the  balances  to  be  provided  for  would  be  at  once 
ascertained ;  and  measures  for  payment  in  the  most  advanta 
geous  mode  could  be  adopted.     As  the  work  of  adjustment  now 
proceeds,  however,  in  a  detached  manner,  by  the  drawing  and 
circulation  of  bills  of  exchange,  it  remains  long  in  doubt  how  the 


220  EQUAL    INTERCHANGE    IS    PAYMENT. 

balances  will  result ;  and  exchange  fluctuates  in  price,  because 
no  one  can  tell  what  the  supply  will  be  in  comparison  with  the 
demand.  This  fluctuation  in  the  price  of  bills  is  a  real  obstacle 
to  the  progress  of  adjustment ;  but  it  is  an  obstacle  not  neces 
sarily  belonging  to  the  process  of  payment.  It  arises  from 
ignorance  of  facts  which  are  accessible ;  from  the  want  of  infor 
mation  which  is  attainable  by  proper  legislation.  The  mere 
advance  in  the  price  of  exchange  arising  from  over-importation, 
and  a  consequent  short  supply  of  bills,  is  no  evil,  but  a  whole 
some  regulator  of  trade.  It  is  a  check  upon  over-trading,  a 
damper  upon  speculation,  and  thus  a  benefit  to  commerce, 
although  it  interposes  a  difficulty  in  such  payment.  Every 
means  should  be  used  to  avoid  fluctuations  arising  from  uncer 
tainty,  from  want  of  correct  information  —  not  those  which  pro 
ceed  from  the  greater  or  less  demand  or  supply  of  bills. 

The  use  of  bills  admits  an  interchange  of  commodities  to  the 
extent  of  the  productive  power  of  nations :  the  only  limitation 
is,  that  the  interchange  must  be  equal.  The  goods  of  one  must 
pay  for  the  goods  of  the  other ;  and  so  long  as  this  equality  is 
regarded,  no  difficulty  can  occur  in  the  payment.  When  the 
equality  is  violated,  and  other  payment  is  required  than  in  the 
usual  commodities,  then  difficulty  arises,  which  will  be  extreme  in 
proportion  as  the  inequality  is  great.  The  efficiency  of  bills  for 
this  mode  of  setting  off  debts  has  been  found  ample  for  almost 
every  exigency  of  trade ;  they  circulate  over  the  widest  extent 
of  territory,  and  from  one  nation  to  another,  and  thus  save  all 
necessity  for  a  general  congregation  of  merchants.  The  great 
system  of  payments,  by  which  the  exports  and  imports  of  a 
nation  are  balanced  against  each  other,  goes  on  thoroughly 
among  merchants  widely  scattered,  without  personal  communi 
cation,  and  without  their  appreciating  the  magnitude  of  the 
transaction  of  which  their  individual  concerns  form  a  part. 

The  examination  of  tables  of  exports  arid  imports  of  the  prin 
cipal  commercial  countries  will  reveal  at  a  glance  how  the 
mutual  accounts  are  balanced  by  the  paper  process,  and  to  what 
a  small  amount,  comparatively,  is  the  aid  of  the  precious  metals 
brought  in  requisition.  It  is  true  that,  in  the  course  of  this 


EXCHANGE    SETTLES    EQUIVALENTS.  221 

adjustment,  in  which  such  multitudes  scattered  over  a  vast  space 
are  concerned,  many  difficulties  arise  from  the  varying  moneys 
of  account,  and  regulations  of  the  mints,  in  those  countries  in 
which  the  goods  are  valued,  from  the  monopolizing  operations 
of  great  capitalists,  from  a  spirit  of  speculation,  from  a  general 
want  of  confidence,  from  the  condition  of  the  currency  in  the 
countries  engaged  in  the  commerce,  and  from  a  great  variety  of 
other  causes ;  but  these  impediments  are  merely  the  friction  of  the 
machinery  which  continues  to  accomplish  the  payments  of  trade. 
The  fluctuations  in  the  price  of  bills  of  exchange  thus  employed 
as  instruments  of  adjustment,  which  attract  so  much  attention, 
and  are  so  important  to  certain  classes  of  merchants,  are  of 
small  consequence  comparatively ;  for  when  bills  are  above  par, 
the  exporter  reaps  the  profit ;  and  when  below  par,  the  importer 
who  is  the  purchaser  enjoys  .the  advantage.  '  At  least  this  is 
true,  except  so  far  as  foreigners  have  not  usurped  the  business 
of  importation. 

The  great  law  of  trade  upon  which  exchange  is  based,  is  an 
equivalent  exchange  of  commodities :  where  this  fails,  exchange 
ceases.  Where  the  debts  are  equal,  the  operations  of  exchange 
will  balance  them :  where  the  equality  ceases  exchange  stops, 
except  so  far  as  it  may  be  prolonged  upon  the  credit  of  those 
who  deal  in  it,  and  a  further  transfer  of  commodities,  or  of 
money,  must  take  place. 


I  3.  Fallacy  of  regarding  foreign  exchange  as  a  criterion  of  domestic  cur 
rency —  Foreign  exchange  is  simply  the  process  of  paying  and  receiving 
debts  of  foreign  trade  —  The  medium  employed  has  its  proper  agency  —  So 
witli  the  payments  of  domestic  trade  —  Neither  should  guide  nor  control 
the  other  —  The  payments  as  distinct  as  the  trade  to  which  they  belong 
Long-continued  adverse  foreign  exchange  of  American  colonies,  and  its 
results. 

Among  the  fallacies  which  have  prevailed  at  various  times  in 
regard  to  foreign  exchange,  one  of  the  most  absurd  and  most 
dangerous  has  been,  that  the  rate  of  foreign  exchange  furnishes 
a  true  criterion  of  the  value  and  quantity  of  the  interior  cur 
rency.  It  is,  perhaps,  not  so  difficult  to  imagine  how  such  a 


222      EXCHANGE    NO    CRITERION    OF    CURRENCY. 

notion  originated,  as  it  is  to  tell  why  it  has  so  long  maintained 
its  sway  over  intelligent  minds  ;  for  it  is  still  defended  by  states 
men  and  authors  of  high  standing  in  Great  Britain.  These  go 
so  far  as  to  contend  that  the  foreign  exchange  is  the  true  regu 
lator  of  the  currency  of  a  country ;  that  money  or  currency 
should  be  plenty  or  scarce,  as  exchange  rules  low  or  high.1  This 
is  not  merely  wrong,  but  it  may  be  asserted  that  a  more  unsafe 
and  delusive  guide  for  the  regulation  of  a  paper  currency  cannot 
be  found.  The  fact  that  an  exportation  of  specie  consequent  upon 
an  adverse  exchange  produces  a  contraction  of  currency,  and 
other  mischiefs,  does  not  prove  the  rate  of  the  exchange  to  be  the 
rule  of  currency.  The  exchange  is  simply  the  adjustment,  by  bills 
of  exchange,  of  the  payments  arising  out  of  the  foreign  trade, 
which  in  many  countries  does  not  reach  1  per  cent,  of  the  home 
trade,  and  in  none  does  it  reach  more  than  10  or  12  per  cent.  The 
payments  of  the  foreign  and  domestic  trade  are  to  be  made  by 
those  engaged  in  each;  and  they  are  wholly  distinct:  the  pay 
ments  of  the  foreign  trade  may  be  larger  or  less,  but  each  must 
be  provided  for  according  to  its  demands.  Over-trading  in  the 
home  trade  produces  a  high  rate  of  interest ;  over-trading  in 
imports  produces  a  high  rate  of  exchange.  The  operation  of 
adjustment  by  bills  is  much  more  effective,  because  more  concen 
trated,  in  the  foreign  trade  than  in  the  domestic ;  so  far  as  they 
are  equivalent,  it  is  setting  off  the  goods  exported  against  those 
imported,  thereby  effecting  an  immense  saving  of  money  in 
the  mode  of  payment,  none  being  used  except  to  discharge 
balances.  The  dealers  in  exchange  may  be  said  to  be  book 
keepers  of  the  foreign  trade,  who  charge  the  goods  exported, 
and  credit  those  imported,  and  only  pay  or  demand  money  upon 
the  balances  for  or  against  their  own  country.  In  paying  these 
balances  only  is  gold  or  silver  used.  In  the  home  trade  the 
domestic  currency  is  largely  used,  because  this  trade  is  more  sub 
divided,  more  mingled  with  the  retail ;  because  no  arrangement 
for  payment  by  domestic  bills  of  exchange  and  promissory  notes 
has  ever  been  devised  so  comprehensive,  and  yet  so  simple,  as 

1  Torren's  Letter  to  Tooke,  1840,  page  20. 


FOREIGN    AND     DOMESTIC     PAYMENTS.  223 

the  payments  by  foreign  exchange  ;  and  finally,  because  the 
home  trade  is  of  ten  times  the  magnitude  of  the  foreign.  To 
carry  on  the  home  trade  with  advantage,  a  large  amount  of  cur 
rency  is  required ;  and  bank-notes,  and  the  working  of  bank 
deposits,  have  been  found  very  effective,  economical  and  conve 
nient.  They  are  so  readily  adapted  to  all  the  requirements  of 
business,  that  they  save  a  resort  to  many  otherwise  necessary 
expedients.  The  payments  in  this  home  trade  are  thus  distinct 
from  those  of  the  foreign;  there  is  no  propriety  in  blending 
them,  and  still  less  in  making  them  dependant  upon  each  other, 
or  in  giving  one  control  over  the  other.  There  is  no  necessity 
that  confusion  or  trouble  in  the  one  should  produce  like  results 
in  the  other.  General  causes  may  operate  alike  on  both ;  but 
what  specially  disturbs  the  payments  of  the  merchant  engaged 
in  foreign  trade  should  not  necessarily  disturb  the  payments  of 
the  domestic  trader,  as  each  class  must  pay  its  own  debts  by 
that  mode  of  adjustment  which  is  most  approved.  In  all  this 
we  refer  not  to  the  ability  to  meet  engagements,  but  to  the 
mere  machinery  of  payment ;  and  we  mean  that  derangement 
in  the  machinery  of  payment  used  in  the  foreign  trade  should 
not,  and  does  not,  necessarily  derange  the  payments  of  domestic 
trade,  unless  some  unwise  and  needless  connection  is  established 
between  them.  If  the  importing  merchants  of  the  country 
have,  therefore,  in  competition  with  foreigners,  imported  too 
many  goods,  and  they  find  a  short  supply  of  foreign  bills  to 
make  their  foreign  remittances,  that  furnishes  no  sound  reason 
why  the  merchants  and  manufacturers  of  the  interior  should  be 
embarrassed  in  their  business,  or  why  they  should  not  be  sup 
plied  with  the  regular  quantity  of  domestic  currency  which  that 
business  requires.  If  the  importing  merchants  find  themselves 
under  the  necessity  of  taking  specie  from  the  banks  to  complete 
their  payments,  that  should  not  abridge  the  facilities  of  the 
domestic  merchant. 

How,  then,  has  it  become  a  doctrine,  that  the  supply  of 
domestic  currency  should  be  regulated  by  the  state  of  foreign 
exchange  —  a  doctrine  about  as  well-founded,  as  that  our  sup 
ply  of  beef  at  home  should  be  determined  by  our  supply  of 


224   EXCHANGE  AND  SUPPLY  OF  CURRENCY. 

pepper  from  abroad  ?  This  strange  and  erroneous  opinion 
sprung  from  another  doctrine  not  less  false,  but  more  plausible ; 
that  foreign  exchange  is  a  true  index  (not  of  the  price,  for 
that  would  be  true,  but)  of  the  value  of  money.  Those  hold 
ing  this  opinion  seem  to  think  that  whatever  value  or  price  we 
may  place  upon  our  domestic  currency,  be  that  what  it  may,  it 
is  brought  to  an  unerring  test  when  it  comes  to  be  applied  to 
the  purchase  of  a  foreign  bill :  that  is,  when  we  wish  to  place  a 
sum  of  money  in  a  foreign  country,  we  must  necessarily  insti 
tute  a  strict  comparison  between  our  domestic  currency  and  the 
money  of  the  country  to  which  remittance  is  to  be  made.  This 
is  clearly  a  mistake,  when  laid  down  as  a  general  rule ;  so,  also, 
is  an  opinion  frequently  stated  in  connection  with  it,  that  the 
rate  of  exchange  is  governed  by  the  plenty  or  scarcity  of 
money.  No  doubt  the  supply  of  money  has  its  influence  on 
foreign  exchange ;  and  if  all  other  influences  were  removed, 
the  rate  would  depend  on  the  money  market.  But  that  which 
completely  destroys  both  these  doctrines  is,  that  the  rate  of 
foreign  exchange  depends  mainly  on  the  supply  of  bills,  and  the 
demand  for  them.1  This  supply  depends  on  the  amount  of 
goods  exported,  and  the  amount  to  be  remitted  for  goods  im 
ported.  These  are  main  elements  of  the  rate  of  exchange. 
The  quantity  of  goods  exported  depends  on  the  state  of  the 
markets  throughout  the  world,  and  the  special  intelligence, 
enterprise  and  activity  of  those  engaged  in  that  trade ;  the 
amount  of  goods  imported  depends  on  similar  considerations. 
If  large  exports  make  bills  plenty,  they  must  be  sold  at  a  dis 
count  ;  if  large  imports  make  bills  in  great  demand,  they  must 
sell  at  a  premium.  It  is  the  price  of  the  bill,  the  paper  instru 
ment  of  exchange,  which  fluctuates  in  proportion  to  the  supply 
and  demand;  these  variations  do  not  indicate  the  value  of 
money,  or  its  scarcity  or  plenty ;  but  they  mark  the  current 
price  of  the  article  of  remittance.2  It  is  the  bill  of  exchange 
which,  in  these  cases,  is  bought  and  sold,  and  not  the  money. 
But  this  ceases  to  be  the  case  when  the  price  of  bills  becomes 

1  "  Blake  on  Exchange,"  page  91.  2  Ibid,  pages  32,  33,  GO. 


EFFECTS    OF    HIGH   RATES    OF 

so  enhanced,  that  the  buyers  turn  their  attention  from  the  pur 
chase  of  bills  to  the  purchase  of  coin  or  bullion.  These  be 
coming,  then,  the  special  article  in  demand,  at  once  rise  in 
price ;  and  whilst  under  this  influence,  vary  in  their  market 
value  according  to  the  intensity  of  the  demand.  Of  course  the 
intrinsic  value  of  the  precious  metals  undergoes  no  change  cor 
responding  with  these  variations.  The  influence  and  effect  are 
special  and  local.  It  is  well  known  to  experienced  merchants 
that,  under  the  operation  of  a  continued  demand  for  the  pre 
cious  metals  for  remittance,  they  may  reach  a  very  high  price 
in  countries  where  there  is  no  access  to  banks  compelled  to 
deliver  them  at  par.  The  only  check,  if  the  demand*  continues, 
is  the  flowing  in  of  the  precious  metals  for  the  benefit  of  the 
high  price.  It  is  often  said  that  exchange  cannot  rise  higher 
than  the  cost  of  remitting  the  specie  ;  but  this  is  not  true,  as  a 
general  rule,  except  where  there  are  banks  bound  to  furnish 
specie  on  demand.  This  opinion  only  took  root  in  England 
after  the  establishment  of  the  Bank  of  England. 

In  many  cases,  where  the  effect  of  a  continued  demand  for 
the  precious  metals  for  exportation  has  been  most  remarkable  in 
its  influence  upon  this  price,  the  operation  has  been  masked  by 
the  destruction  of  the  money  of  account.  Our  commercial  his 
tory,  previous  to  the  separation  from  Great  Britain,  affords 
many  apt  illustrations.1  A  long-continued  adverse  exchange 
caused  gold  and  silver  to  be  in  such  constant  demand  for  export 
to  England,  that  the  price  of  exchange,  and  of  coins  or  bullion, 
ranged  for  a  long  time,  and  in  many  places,  from  <£!  33  to  £175 
currency  for  £100  sterling.  This  enormous  rate  was  the  effect 
of  a  continued  unfavorable  exchange.  Other  causes  operated 
simultaneously,  in  some  of  the  colonies,  to  break  up  the  money 
of  account,  or  establish  a  depreciation  of  the  colonial  currency. 
These  were  chiefly  the  abuse  of  paper  issues :  thus,  in  Massa 
chusetts,  the  price  of  exchange  reached  £1100  for  £100  ;  in 
Rhode  Island,  £2300  for  £100;  and  in  South  Carolina,  £700 

1  "  llays'  Negotiator,"  p.  221.  "American  Negotiator,"  vol.  iv.  "  POST 
tlethwaite's  Commercial  Dictionary,"  Art.  "  Currency." 

15 


226      COLONIAL  MONEYS  OF  ACCOUNT. 

for  X100.  The  price  of  the  Spanish  dollar  in  Massachusetts, 
in  1749,  was  sixty  shillings ;  the  sterling  price  was  four  shil 
lings  and  eight  pence.  It  was  not  these  vast  fluctuations  which 
produced  the  results  we  are  about  to  notice,  as  they  wTere  so 
rapid  and  extraordinary  as  to  require  and  to  receive  legislative 
correction.  But  the  unfavorable  exchange  and  high  price  of 
the  precious  metals  which  prevailed  extensively  and  endured 
for  a  period  of  more  than  half  a  century,  finally  broke  up 
and  changed  the  money  in  which  all  men  reckoned  and  kept 
their  accounts.  We  do  not  say  that  this  was  a  necessary  or 
proper  result,  but  that  it  was  inevitable,  unless  the  theory  of 
money  was  better  understood,  or  counteracting  measures  were 
adopted.  When  men  were  first  offered  an  advance  for  coins 
—  that  is,  when  five  shillings  began  to  be  offered  for  the  dollar, 
that  was  worth  only  four  shillings  and  eight  pence  in  England — 
they  would  readily  see  that  this  was  an  advance  in  the  price  of 
coins;  and  it  would  be  equally  clear,  as  the  price  advanced 
gradually  to  seven  shillings  for  the  dollar.  But  when  this  price 
remained  almost  stationary  for  half  a  century,  the  general 
prices  of  the  country  would  become  fixed  or  arranged  on  the 
depreciated  scale.  For  a  long  time  it  might  be  that  prices 
would  be  quoted  in  both  ways ;  that  is,  for  specie  and  for  cur 
rency.  And  so,  in  fact,  they  were  in  every  colony ;  and  every 
purchaser  had  it  in  his  selection  to  pay  in  specie,  in  currency, 
or  in  articles  of  trade ;  and  the  price  was  according  to  the  pay 
ment.1  By  degrees  the  original  price  of  the  dollar  was  lost 
sight  of  in  all  the  dealings  in  the  colonies ;  the  high  price  at 
first  known  to  be  the  result  of  special  demand  for  exportation, 
or  of  a  high  exchange,  from  long  habit  came  to  be  regarded  as 
the  regular  price ;  and  the  general  range  of  the  rates  of  commo 
dities  being  more  commonly  quoted  in  the  depreciated  scale, 
the  latter  became  established  in  all  minds  as  the  money  of 
account.  The  change  of  the  money  of  account,  or  scale  of 
reckoning,  would  be  thus  complete.  It  was  by  this  process  that 
the  pound,  shilling  and  penny  sterling  became  so  changed,  that 

1  "  Felt's  Massachusetts  Currency,"  page  54. 


RATES    OF    EXCHANGE. —  CONCLUSION.          227 

the  dollars  worth  from  four  shillings  six  pence  to  four  shillings 
eight  pence,  came  to  be  rated  in  the  colonies  at  six  shillings, 
seven  shillings  six  pence,  and  eight  shillings.  Thus,  in  Virginia, 
in  Pennsylvania,  and  in.  New  York,  a  separate  and  different 
scale  of  reckoning  was  adopted:  in  the  first  $3T3030,  in  the 
second  $2T6<j6o,  and  in  the  last  $2y50°<j,  became  the  equivalent  of 
the  respective  pounds  or  units  of  the  respective  moneys  of 
account ;  and  the  prices  of  all  the  commodities  of  trade  were 
adjusted  and  expressed  in  these  several  moneys  of  account,  in 
proportion  to  the  value  expressed  by  these  units. 

The  rate  of  exchange  is,  then,  strictly  applicable  to  bills  of  ex 
change,  and  only  expresses  the  price  of  these  commercial  instru 
ments  of  adjustment  and  remittance;  when  coin  or  bullion  become 
the  cheaper  remittance  the  rate  expresses  their  local  price. 
Foreign  exchange  is  no  criterion,  either  of  the  value  of  money, 
or  of  its  scarcity  or  abundance.  If  money  is  plenty,  when  bills 
are  in  demand,  the  rate  of  exchange  may  go  higher ;  if  scarce, 
it  may  restrict  the  exchange  to  a  lower  point  than  it  would 
reach  in  a  more  easy  money  market.  The  whole  operation  of 
foreign  exchange,  so  far  as  it  belongs  to  commerce,  is  an  affair 
of  the  foreign  merchants  :  it  arises  out  of  their  business,  it  is  an 
economical  expedient  to, effect  their  payments,  and  is  governed 
in  its  movement  by  the  varying  amount  of  these  payments. 


NOTE    TO    CHAPTER    VIII. 

Foreign  exchange  in  its  relations  with  our  banks  —  The  export  of  specie,  and 
the  contraction  of  our  currency  —  Resident  agents  of  foreign  merchants 
and  manufacturers,  and  their  influence  on  our  foreign  exchange  and 
domestic  currency. 

THE  fact  that,  in  Great  Britain  and  in  the  United  States,  the  exportation 
of  gold  produces  a  contraction  of  the  respective  currencies,  which,  if  con 
tinued,  results  in  a  commercial  crisis,  is,  as  we  shall  see  hereafter,  a  conse 
quence  of  the  special  constitution  of  our  respective  banking  systems.  In 
securing  the  solidity  of  our  banks,  and  the  convertibility  of  our  paper  cur 
rency,  we  have  placed  them  under  the  necessity  of  furnishing  to  the  buyers 
of  foreign  exchange  coins  or  bullion  at  par,  whenever  it"  becomes  their  in 
terest  to  demand  them.  It  becomes  their  interest  to  make  such  demand 
after  every  excessive  movement  in  their  business.  They  are  chiefly 
foreigners,  and  are  the  more  apt  to  over-trade,  and  over-stock  our  markets 
with  foreign  goods,  because  they  are  imperfectly  acquainted  with  the  wants 
of  the  people,  and  the  state  of  our  markets.  Besides,  they  are  frequently 
forced  to  flood  our  markets,  because  their  own  are  already  filled  or  broken 
down,  and  they  prefer  to  make  forced  sales,  when  they  are  to  be  made, 
among  us,  to  making  them  at  home.  All  such  operations,  however,  must 
create  an  extraordinary  demand  for  bills  of  exchange,  a  rise  in  their  price, 
and  a  consequent  demand  for  the  precious  metals,  which  the  banks  are 
called  upon  to  supply.  Every  holder  of  gold  and  silver,  in  such  cases,  is 
permitted  to  ask  the  highest  rate  he  can  obtain  for  them  ;  but  the  banks 
cannot  advance  the  price,  and  must  furnish  all  that  is  required,  at  the  risk 
of  ruin.  To  saVl  themselves  in  such  emergencies,  they  must  curtail  their 
facilities  to  the  domestic  trade,  until  interest  among  domestic  traders  rises 
three  or  four  hundred  per  cent.,  and  the  fall  of  prices  has  inflicted  upon 
the  country  suffering  it  a  loss  of  perhaps  ten  times  the  whole  value  of  the 
over-importation  which  caused  it.  If  no  other  fault  existed  in  our  present 
banking  system  than  this,  not  a  moment  should  be  lost  in  finding  a  remedy. 
But  so  false  are  some  of  the  opinions  entertained  by  writers  and  public 
men  of  high  standing,  both  in  the  United  States  and  in  Great  Britain,  that 
they  regard  every  evil  arising  from  the  working  of  the  foreign  exchange  as 
inevitable.  They  may  be  considered  as  looking  at  the  fluctuations  of  ex 
changes  as  they  do  at  the  changes  of  the  weather  and  the  seasons.  They 
must  be  encountered  and  endured,  and  all  we  can  do,  as  they  think,  in  de 
fence  is  to  look  to  our  clothing  and  our  shelter.  They  regard  the  fall  in 

(228) 


NOTE    TO     CHAPTER    VIII.  229 

prices  consequent  upon  the  contraction  of  the  facilities  of  the  home  trade, 
although  inflicting  a  loss  equal  to  all  the  specie  in  the  country,  as  desirable, 
because  the  low  price  of  goods  may  tempt  the  exporters  of  the  coin  to  send 
commodities  of  trade.  They  know  of  but  two  ways  of  protecting  the  banks 
from  the  extraordinary  demands  of  importing  merchants :  the  one  is  to 
make  the  paper-money  used  chiefly  by  the  domestic  trader  excessively 
scarce  ;  and  the  other,  to  cause  a  general  fall  in  prices  sufficient  to  cause 
an  increased  exportation  of  goods.  If  this  is  not  an  enormity  of  mischief 
and  absurdity,  it  will  be  needless  to  seek  for  one.  It  is  crushing  a  hundred 
thousand  to  save  a  hundred  ;  it  is  crushing  industry  to  save  commerce ;  it 
is  crushing  him  that  makes,  to  save  him  that  carries  ;  it  is  levying  ten  per 
cent,  on  three  thousand  millions  of  home  products,  to  save  the  importers 
from  paying  ten  per  cent,  on  three  hundred  millions  of  foreign  products ; 
sacrificing  the  value  of  300  millions,  and  ruining  thousands  of  men,  to  save 
a  few  scores  of  importing  merchants  the  disadvantage  of  a  high  rate  of  ex 
change.  It  is  in  England  that  the  opinions  we  controvert  are  most  fre 
quently  asserted;  the  act  of  1844,  in  reference  to  the  Bank  of  England,  is 
expressly  founded  upon  such  doctrines.  It  is  not  to  be  supposed  they  will 
be  without  defenders  here,  and  that  our  commercial  legislation  will  escape 
the  influence  of  absurdities  sustained  by  such  high  authority. 

There  is  another  abuse  of  our  foreign  exchange  which  has  prevailed  of 
late  years  upon  quite  a  large  scale,  with  results  very  injurious  to  the  regular 
course  of  business.  The  practice  originated  in  the  days  when  sailing 
packets  required  an  average  of  a  month  to  make  a  passage  to  Liverpool, 
and  before  steamers  and  telegraphs  had  lent  their  aid  to  commerce,  of 
drawing  bills  upon  European  correspondents  at  sixty  days,  without  in 
terest.  This  practice,  like  that  of  quoting  the  pound  sterling  at  $4.44, 
under  a  law  of  1799,  is  still  absurdly  continued.  Now,  when  the  mails, 
and  parcels,  and  gold  itself,  go  to  Europe  in  from  ten  to  fifteen  days,  the 
continuance  of  this  long  exchange  has  become  a  source  of  positive  mischief. 
All  who  are  acquainted  with  the  manner  in  which  the  importation  of 
foreign  goods  is  conducted  in  the  United  States,  know  that  it  has,  in  a 
large  degree,  fallen  into  the  hands  of  foreign  houses.  The  ad  valorem  sys 
tem  of  1846  has  contributed  mainly  to  this.  There  has  long  been  a  dispo 
sition,  on  the  part  of  foreign  manufacturers,  merchants  and  speculators,  to 
make  our  markets  the  receptacle  of  the  surplus  not  merely  of  foreign  pro 
duction,  but  of  all  the  foreign  markets.  The  temptation  was  great  on  two 
grounds:  our  people  were  extravagant  consumers,  and  by  sending  commo 
dities  here  they  saved  their  own  market  from  breaking  down.  When,  in  ad 
dition  to  this,  they  were  made,  by  the  ad  valorem  appraisement,  the  valuers 
of  their  own  goods,  they  had  the  strongest  inducements  to  sell  goods  here 
not  in  active  demand  at  home.  Double  invoices  were  freely  used  and  ten 
dered,  not  only  to  merchants,  but  to  all  persons  bringing  goods  from  Europe. 
This  system,  however,  involved  some  risks,  and  occasional  serious  losses, 


230  NOTE    TO    CHAPTER    VIII. 

and  has  been  nearly  superseded  by  another  system  of  evasion.  The  foreign 
manufacturer  now  sends  here  a  clerk,  or  agent,  or  partner,  who  becomes 
forthwith  an  importing  merchant.  The  goods  to  be  imported  are  invoiced 
to  him  at  cost,  without  any  perjury,  or  other  evasion  of  law.  The  goods 
are  sold  in  our  market  for  the  highest  price  which  can  be  obtained;  and 
the  whole  proceeds,  profits  and  all,  less  only  the  expenses  of  the  agent,  are 
remitted  to  the  foreign  concern  in  specie,  or  by  bill,  according  to  the  state 
of  the  exchange.  This  system  invites  large  importations,  because  the 
foreign  manufacturer  is  virtually  the  importer;  he  reaps  all  the  profits, 
and  foreign  labor  is  proportionably  encouraged.  It  brings,  also,  a 
much  more  formidable  and  serious  competition  against  our  manufac 
turers,  because  the  goods  brought  here  against  them  are  produced 
where  wages,  and  interest,  and  many  articles  of  raw  materials,  are  at 
half,  or  less  than  half,  the  rates  prevailing  here.  The  sixty  day  bills 
on  Europe  are  found  to  be  a  powerful  incentive  to  this  anomalous 
mode  of  importation.  These  foreign  agents,  clerks,  or  partners  become 
sellers  of  bills  of  exchange.  For  this  purpose  the  foreign  house  to  which 
they  belong  has  only  to  introduce  them  properly,  and  pay  promptly  the 
bills, thus  drawn.  In  this  way  these  houses  can  raise  money  in  New 
York  to  any  extent  necessary,  not  only  for  the  payment  of  duties,  but  also 
to  be  remitted  in  the  shape  of  bills  purchased,  or  specie,  to  their  establish 
ments  in  Europe,  to  assist  in  the  manufacture  of  goods  to  be  sent  here.  If 
the  specie  is  sent  over,  the  use  of  the  money  is  thus  obtained  for  same  forty 
days  without  interest,  and  the  operation  may  be  repeated,  and  a  large 
accommodation  secured:  they  find  it  easier  to  raise  money  in  the  New  York 
market,  where  interest  has  ruled  from  seven  to  ten  per  cent.,  than  in 
Europe,  where  it  has  ruled  from  three  to  five  per  cent. 

We  have  reason  to  believe  that  this  process  has  carried — and  if  no 
change  occurs  in  our  policy,  must  continue  to  carry  —  large  quantities  of 
the  precious  metals  from  the  United  States.  It  furnishes  a  strong  motive 
to  remit  by  specie,  instead  of  by  bills  of  exchange;  because  the  specie, 
when  it  arrives,  is  cash  in  hand,  and  not  a  bill  with  forty  days  to  run. 
Ihus  we  often  see  gold  shipped  in  large  sums,  when  the  state  of  the  ex 
change  scarcely  seems  to  justify  it.  These  foreign  houses  are  so  many 
agencies  for  drawing  money  from  the  United  States,  and  transmitting  it  to 
Europe  to  aid  in  building  up  establishments  there,  which,  without  this  help 
at  our  expense,  have  more  than  power  enough  over  our  industry  and  our 
laborers.  The  effect  is  to  raise  interest  here,  and  to  reduce  it  there ;  to 
disturb  our  currency,  and  render  their  own  more  safe ;  to  make  our  money 
market  hard,  and  their  own  easy. 

Of  all  this,  it  is  not  difficult  to  see  the  mischief,  the  injury  sustained  by 
our  industry,  and  by  our  currency :  what  is  the  advantage  ?  We  have  im 
porting  merchants  enough  to  secure  us  from  any  want  of  foreign  goods,  with 
out  this  ample  license  to  foreign  houses,  manufacturers,  and  merchants.  This 
influx  of  foreign  agencies  comes  chiefly  from  France,  Germany,  and  Belgium. 


CHAPTER    IX. 

BANK-NOTES. 

The  facility  and  power  of  lank-notes  —  Some  disadvantages  —  Properly 
issued  in  exchange  for  the  business  paper  of  individuals  —  Converti 
bility  not  the  basis  of  the  power  of  bank-notes,  but  a  security  against  abuses 
—  Inadequacy  as  stick  —  Distinction  between  business  of  banks  and  the 
restraints  imposed  upon  them  —  Bank-notes  a  medium  by  which  the  com 
modities  of  trade  pay  for  commodities  —  Great  demand  for  bank-notes  by 
the  debtors  of  the  banks,  the  cause  and  result  —  Bank-notes  represent  value 
of  articles  of  consumption  in  channels  of  trade  —  Received  in  payment  for 
these  articles  of  necessity  as  freely  as  specie —  Circulation  of,  efficiency  in 
that  way — Exchange  of  between  the  banks  operates  like  tickets  —  Proportion 
of  bank-notes  employed  in  business  decreasing. 

PROMISSORY  notes,  or  bills  of  exchange,  depend  for  their  effect 
in  circulation  as  a  medium  of  payment,  upon  the  credit  of  the  parties 
— drawers,  acceptors  and  indorsers — whose  names  are  attached. 
Unless  these  are  widely  known,  their  paper  cannot  have  a  large 
circulation,  as  scrutiny  and  inquiry  may  have  to  be  made  with 
regard  to  every  name.  This  is  a  serious  check  to  the  circulation 
of  such  paper.  The  credit  system  has  furnished,  in  the  shape 
of  bank-notes,  a  very  efficient  and  convenient  medium  of  ex 
change.  A'  bank  with  large  capital  and  good  credit  furnishes 
its  own  notes  at  the  regular  rate  of  interest,  in  exchange  for 
those  of  individuals.  The  bank-notes  being  of  convenient  deno 
minations,  in  amounts  suited  to  the  ordinary  transactions  of 
business,  large  and  small,  are  at  once  not  only  more  available  in 
payments  than  promissory  notes  and  bills  of  exchange,  but  more 
so  than  coins  of  silver  or  gold.  It  cannot  be  necessary  to  enlarge 
upon  the  facility  and  efficiency  of  bank-notes  as  a  medium  of 
payment.  It  is  hardly  possible  to  conceive  of  any  medium  more 
easy  to  carry  or  circulate  as  a  substitute  for  money.  The  sub- 

(231) 


232  BANKS    OF    CIRCULATION. 

stitution  of  these  in  trade  for  promissory  notes,  or  bills  of  ex 
change,  proved  from  the  first  an  immense  facility  in  business. 
But  as  bank-notes  are  attended  with  many  difficulties  in  regard 
to  hazard  of  robbery,  of  fire,  of  forgery,  and  insolvency  of 
banks,  thgy  do  not  furnish  a  satisfactory  medium  in  all  respects, 
and  leave  much  to  be  desired.  Whatever  facilities  there  may 
be  in  their  use,  so  many  are  the  obstacles  in  the  way  of  shaping 
an  adequate  banking  system,  so  much  difficulty  in  obtaining 
proper  securities  against  abuses,  so  much  distrust  in  the  public 
mind  of  institutions  having  the  important  power  of  issuing  their 
own  notes  to  be  circulated  and  received  as  money,  that  we 
refrain  here  from  entering  into  these  or  any  similar  topics.  Our 
object  now  is  only  to  explain  how  bank-notes  are  so  effective  as 
a  means  of  payment,  and  how  the  substitution  of  the  notes  of 
banks  for  the  notes  of  individuals  operates.  We  assume,  then, 
for  the  present,  that  the  notes  are  issued  by  safe  banks  in  good 
credit,  and  doing  a  legitimate  business. 

The  proper,  safe  and  legitimate  business  of  a  bank  of  circula 
tion  is  to  issue  its  own  notes,  either  in  substitution  or  in  ex 
change  for  commercial  paper,  such  as  the  promissory  notes  and 
bills  of  exchange  of  individuals.  These  may  not  be  sufficiently 
known ;  their  paper  is,  for  the  most  part,  of  unsuitable  form  and 
amounts,  indivisible,  and  otherwise  inconvenient  for  general  cir 
culation.  The  notes  of  a  bank,  on  the  other  hand,  are  well- 
known,  of  convenient  amount  and  form ;  they  are  divisible,  or 
at  least  obtainable  in  any  desired  denominations,  and  are  other- 
wise  convenient  for  constant  use  in  payment  of  large  or  small 
sums.  They  not  only  perform  all  the  functions  of-  a  currency, 
or  circulating  medium,  which  the  individual  commercial  paper, 
for  which  they  are  substituted,  could  perform,  but  many  other 
purposes  which  it  could  not ;  they  become,  in  fact,  not  merely  a 
substitute  for  individual  paper,  but  for  money  itself.  It  is  this 
latter  quality  which  makes  the  power  of  issue  so  dangerous  to 
the  public,  and  therefore  the  subject  of  so  much  caution  on  the 
part  of  public  authorities.  It  cannot  be  denied  that  the  power 
of  issuing  paper-money,  for  such  in  effect  is  bank-notes,  should 
not  be  conceded  without  extraordinary  safeguards  and  precau- 


SPECIE    PAYMENTS.  233 

tions.  Among  these,  one  of  the  most  stringent  and  effective  is 
the  liability  of  redeeming  all  their  issues  on  demand  in  gold  or 
silver.  Even  this  has  not  proved  effectual,  nor  prevented  fre 
quent  abuse.  It  is  left  to  the  public  to  make  the  demand  or  not ; 
if  made,  it  destroys  the  system ;  if  not  made,  abuses  are  not 
only  possible,  but  continue  to  occur. 

But  whilst  it  is  almost  universally  conceded  that,  with  all  its 
imperfections,  the  restraint  of  specie  payments  is  the  most 
reliable  and  effectual  check  upon  banks  of  circulation,  it  must 
not  be  regarded  as  the  basis  of  their  efficiency  or  usefulness 
when  properly  conducted.  It  is  a  security  to  the  public  for 
their  good  behavior,  a  check  upon  over-action,  not  a  power  to 
maintain  movements,  or  give  efficiency  to  movements  otherwise 
useless.  For  twenty  years  and  more,  the  Bank  of  England  paid 
no  specie  for  its  notes ;  and  the  question  which  arose  thereupon 
was  not  whether  the  payments  of  England  were  not  effectually 
made,  during  that  time,  in  the  notes  of  the  bank,  but  whether 
the  bank  had  not  abused  its  privilege  by  issuing  too  many  notes. 
So  in  the  United  States,  during  the  suspension  of  specie  pay 
ments,  the  trade  of  the  country  proceeded;  and  bank-notes 
were  not  less  employed  in  current  payments,  than  when  redeem 
able  in  specie.  The  validity  of  these  payments,  for  the  time 
being,  are  not  called  in  question ;  but  the  people  of  this  country 
have  never  been  satisfied  that  such  a  power  can  be  safely  com 
mitted  to  the  interested  hands  of  bank  directors.  The  continu 
ance  of  specie  payments  is  demanded  by  them  as  the  best  guar 
antee  which  can  be  given  by  banks  of  circulation.  It  being 
important  that  this  distinction  be  kept  in  mind  by  those  who 
would  understand  the  true  ground  of  the  success  of  banks  of 
circulation,  as  one  of  the  great  devices  of  the  credit  system,  we 
have  placed  it  thus  broadly  before  the  reader.  Let  him  regard 
the  movements  of  the  real  business  of  the  bank  wholly  apart 
from  the  restraints  and  responsibilities  under  which  the  bank  is 
placed  to  keep  it  from  running  astray. 

We  recur,  then,  to  the  remark,  that  the  proper  business  of  a 
bank  of  circulation  is  to  issue  its  own  notes  in  place  of  the  actual 
business  paper  of  individuals.  For  the  latter  accommodation, 


234  BANK    NOTES  —  THEIR    EFFICIENCY. 

the  bank  charges  interest  the  same  as  if  it  advanced  money.  We 
pass  over  the  fact  at  present,  that  the  banks  frequently  give,,  in 
place  of  the  notes,  merely  a  credit  for  the  amount  of  the  paper 
discounted  on  their  books,  which  is  to  the  same  effect  as  if  the 
notes  had  been  received  and  deposited.  The  operation  of  bank 
deposits  in  payments  will  come  under  separate  consideration. 
We  have  explained  the  process  by  which  a  payment  is  made  by 
the  negotiation  of  a  promissory  note  or  bill  of  exchange.  The  holder 
of  such  business  paper  has  sold  commodities  of  trade,  for  which  he 
received  the  paper ;  he  purchases  other  commodities,  for  which 
he  pays  with  this  same  paper.  We  have  stated  that  this  mode 
of  payment  is  applicable  only  to  a  very  small  range  of  business, 
and  that  its  inconveniences  led  probably  to  a  larger  employment 
of  the  more  convenient  and  effective  medium  of  bank-notes.  If 
the  holder  of  a  promissory  note,  or  bill  of  exchange,  who  gave 
commodities  for  it,  desires  to  purchase  other  commodities  for  the 
amount  or  a  part  of  it,  he  may  exchange  it  for  the  notes  of  a 
bank.  If,  with  these  bank-notes,  he  purchases  other  commodi 
ties,  or  pays  debts  for  commodities  already  purchased,  it  is  ob 
vious  that  he,  in  substance,  exchanges  the  articles  for  which  he 
receives  the  promissory  note  for  those  which  he  purchases  with 
the  bank-notes.  Thus  these  paper  promises,  whether  the  notes 
of  banks  or  of  individuals,  furnish  a  medium  by  which  men  ex 
change  what  they  have  for  what  they  want.  It  matters  not,  to 
men  of  business,  how  the  final  adjustment  or  discharge  of  these 
bank-notes  and  individual  notes  is  effected,  so  that  they  thereby 
make  what  they  sell  pay  for  what  they  purchase.  It  will  come 
in  our  way  to  explain  fully  how  this  paper  adjustment  takes 
place ;  how  this  immense  amount  of  bank-notes  payable  on  de 
mand,  and  these  individual  notes  payable  in  a  few  months,  all  in 
gold  or  silver,  are  all  fully  paid,  discharged  and  retired  without 
the  use  of  one  per  cent,  of  the  amount  in  the  precious  metals. 
As  this  explanation  involves  other  processes  not  yet  touched,  we 
reserve  it  for  a  future  page,  merely  insisting  here  on  the  supe 
riority  of  bank-notes,  as  a  medium  of  exchange,  to  the  business 
notes  of  individuals. 

The  debtors  to  banks  of  circulation  in  any  commercial  com- 


THE     DEMAND     FOR    BANK     NOTES.  235 

munitj  are  under  a  strong  necessity  of  promptly  meeting  tneir 
engagements  :  no  more  imperative  motive  can  be  brought  to  bear 
upon  them  than  that  of  preserving  their  credit,  and  continuing 
their  business.  Ruin,  bankruptcy  and  utter  discredit  stare 
every  man  in  the  face  who  falters  in  the  performance  of  his 
engagements.  Every  energy,  every  effort  is  put  forth  for  this 
purpose ;  no  sacrifice  of  means,  of  time,  of  skill,  of  mental 
activity,  or  watchful  anxiety,  is  spared  to  accomplish  punctually 
the  payment  of  every  liability  as  it  matures.  This,  then,  creates 
a  demand  for  the  bank-notes,  of  proportionate  intensity.  There 
are  goods  offering  for  sale  by  those  who  have  debts  to  pay, 
which  must  at  all  hazards  be  paid  ;  and  these  goods  must  be 
fully  equal  in  value  to  the  sum  of  the  debts  to  be  paid,  because 
the  debts  were  created  by  the  purchase  of  the  goods :  of  course, 
the  necessity  of  realizing  in  the  bank-notes,  or  Avhat  is  equiva 
lent,  will  compel  the  sellers  to  be  reasonable  in  their  demands. 
All  this  merchandise  is,  therefore,  not  only  applicable  to  the 
purpose,  but  all  the  holders  who  are  debtors  to  the  bank  are  so 
many  agents  actively  employed  in  the  redemption  of  the  bank 
notes.  It  is  this  imperative  demand  for  the  bank-notes,  and 
this  extreme  necessity  of  meeting  bank  liabilities,  which  sustains 
so  amply  the  value  of  the  notes  of  all  well-managed  banks.  A  man 
may  reduce  his  expenses  for  food  and  clothing,  and  wait  many 
days  for  the  gold  and  silver  which  he  is  accustomed  to  pay  for 
these  necessaries ;  but  he  cannot  postpone  a  day  the  payment 
of  his  note  in  bank :  there  is  no  one  article,  then,  so  indispens 
able  to  those  who  are  indebted  in  banks  as  bank-notes,  or  their 
equivalent.  The  notes  issued  by  banks,  in  discount  of  commer 
cial  paper,  must  correspond  as  the  paper  discounted  does  to  the 
value  of  the  goods  for  which  it  was  given.  It  would  require  all 
the  bank-notes  thus  issued  to  purchase  the  goods,  the  sale  of 
which  created  the  paper  in  exchange  for  which  the  bank-notes 
were  given.  The  goods  are  sufficient  to  redeem  the  notes  issued 
upon  them,  and  therefore  sufficient  to  pay  or  redeem  the  bank 
notes  substituted.  Apart  from  the  artificial  securities  required 
of  banks,  this  is  the  real  basis  of  bank-notes.  They  are  issued 
in  exchange  for  individual  notes,  which  are  given  for  the  pur- 


286  PROCESSES    OF    PAYMENT 

chase  of  merchandise  ;  the  sale  of  this  merchandise  produces  the 
means  to  redeem  the  individual  notes,  or  the  bank-notes.  It  is 
this  feature  which  gives  banks  of  circulation  their  firmest  sup 
port.  In  any  commercial  community  where  such  banks  abound, 
they  hold  a  very  large  proportion  of  the  notes  given  for  mer 
chandise,  and  that  merchandise  must  be  the  virtual  basis  on 
which  their  issues  rest ;  the  holders  of  merchandise  of  all  descrip 
tions,  to  suit  the  demands  of  necessity  or  luxury,  offer  it  as  freely 
for  the  bank-notes  as  they  would  for  gold  or  silver,  because  the 
bank-notes  will  pay  their  debts  as  effectually  as  anything  else 
can. 

The  summary  of  this  process  of  payment  is,  that  merchants 
purchase  goods,  and  manufacturers  purchase  supplies,  with  their 
individual  notes  or  bills,  which  are  exchanged  for  bank-notes ; 
and  these  bank-notes  are  either  sought  after  and  obtained  by 
the  debtors  of  the  bank,  to  be  returned  in  payment  of  their 
liabilities,  or  thej^  pay  the  bank  in  some  medium  which  will 
redeem  the  notes.  The  goods  sold  create  the  paper  discounted, 
and  sold  again  they  furnish  the  means  to  withdraw  the  paper 
discounted,  and  the  issues  of  the  bank :  or,  more  generally,  the 
continual  operation  of  trade  constantly  originates  new  paper, 
and  thence  new  issues  from  the  banks,  which  furnish  the 
medium  in  which  the  individual  paper  is  continually  paid.  The 
manufacturer,  merchant  and  farmer  purchase  stock  in  one  period 
of  the  year,  for  which  they  give  their  notes,  which  the  holders 
convert  into  bank-notes.  In  another  period  they  sell  and  create 
paper,  which  is  applied  to  meet  their  engagements.  Thus  goods 
are  bought  and  sold,  or  produced  and  sold,  until  the  distribution 
is  complete,  and  merchant  and  producer  have  received  and 
issued  paper  until  it  is  evident,  in  the  regular  routine  of  their 
business,  that  it  supplies  the  means  of  its  continuance.  Every 
such  business  man,  in  the  course  of  a  year,  issues  his  own  notes 
to  a  certain  amount ;  he  receives,  also,  the  notes  of  others  to  a 
certain  amount ;  he  requires  some  facility  to  set-off  the  notes  he 
receives  against  those  he  has  given.  The  bank  furnishes  that 
facility  in  several  ways.  The  debtor  cannot  directly  exchange 
the  individual  notes  issued  to  him  for  those  he  issues,  but  he  can 


NOT     DEPENDENT    UPON    SPECIE.  237 

convert  those  he  receives  into  bank-notes,  which  will  be  received 
in  payment  for,  or  exchange  for  his  paper.  The  bank  gives 
nothing  but  bank-notes,  or  bank  credits,  for  the  paper  it  dis 
counts  ;  it  requires  nothing  for  payment  but  bank  credits,  or 
bank-notes.  The  debtor  does  not  obtain  this  facility  without  pay 
ing  for  it ;  he  must  purchase  the  bank-notes,  and  he  does  this 
not  with  money  or  coins  necessarily,  but  with  business  paper 
received,  perhaps,  for  the  very  goods  by  purchase  of  which  his 
debt  was  created.  It  is  thus  that  the  whole  body  of  debtors  to 
the  bank  are  competitors,  with  all  the  merchandise  in  their  pos 
session,  for  the  bank-notes  in  circulation  which  furnish  such  a 
convenient  mode  of  discharging  their  liabilities.  The  bank 
notes  so  much  in  request  by  the  debtors  become  equally  in 
request  by  the  whole  body  of  consumers  who  use,  employ  or 
consume  the  goods  held  and  offered  for  sale  by  this  whole  body 
of  debtors.  Coins  and  bullion  are  received  in  exchange  for 
these  same  goods,  simply  because  of  their  intrinsic  value ;  but 
as  these  will  go  no  further,  in  payment  of  debts,  than  the  bank 
notes,  the  latter  are  employed  almost  exclusively  in  countries 
where  banks  of  circulation  are  found. 

This  operation  of  payment  is  entirely  independent  of  the  pre 
cious  metals ;  their  presence  or  agency  is  not  in  the  least  need 
ful  ;  they  have  no  part  in  the  transaction.  We  are  not  speaking 
of  banking  as  regulated  by  law,  but  merely  explaining  the  pro 
cess  of  liquidation,  as  effected  by  bank-notes.  The  usefulness 
of  bank-notes  as  a  medium  of  payment  is  not  confined  to  the 
mere  process  of  liquidation  above  specified  ;  their  efficiency  in 
aid  of  commerce  is,  perhaps,  greatest  by  their  perfect  facility  of 
circulation.  In  practice  they  do  not  pass  immediately  into  the 
hands  of  the  debtors  of  the  bank,  and  from  them  into  the  bank 
in  payment  or  liquidation  of  the  notes  discounted.  They  circu 
late  through  every  channel  of  trade  with  a  rapidity  of  movement 
wholly  unattainable  by  arvy  possible  circulation  of  coins.  They 
are  dispersed,  by  the  thousand  varieties  of  expenditure  among 
all  classes  of  the  community,  to  the  whole  mass  of  the  people  in 
such  proportions  as  the  course  of  trade,  salaries,  wages,  fees, 
and  other  modes  of  income  and  expenditure,  may  bring  about ; 


238  ILLUSTRATIONS. 

all  take  them  freely  in  payment,  simply  because  they  know  they 
will  be  as  freely  received.  The  only  question  is,  will  they  pass  ? 
Whilst  they  arc  performing  all  this  movement,  the  demand  for 
them  by  the  debtors  of  the  bank,  which  is  urgent  and  imperious, 
is  operating  with  incessant  and  anxious  vigor  to  obtain  the  quan 
tity  of  bank-notes  necessary  to  meet  their  daily  maturing  engage 
ments.  As  these  engagements,  in  the  first  instances,  gave  origin 
to  the  issues  of  the  bank,  the  amount  in  circulation  is  just  the 
amount  required.  The  demand  for  them  is,  therefore,  equiva 
lent  to  the  whole  quantity  extant.  So  long  as  this  demand  con 
tinues,  bank-notes  must  keep  their  value,  as  they  are  in  demand 
to  pay  the  same  amount  for  which  they  were  issued. 

The  process  by  which  bank-notes,  in  themselves  of  no  intrinsic 
value,  effect  a  payment  in  this  circulation  is  the  same  as  that 
which  gives  efficiency  to  a  payment  made  by  negotiating  pro 
missory  notes.  The  miller  who  sells  a  lot  of  flour  for  bank 
notes,  and  with  the  same  notes  purchases  wheat,  has  exchanged 
his  flour  for  wheat.  The  merchant  who  sells  goods  for  bank 
notes,  and  with  those  notes  purchases  other  goods,  has  in  fact 
merely  changed  one  lot  of  goods  for  another.  Thus  the  bank 
notes  are  a  mere  medium  of  exchange.  They  are  received  for 
what  is  sold  only  because  they  will  be  received  for  what  is  pur 
chased.  It  is  not  even  the  solvency  of  the  bank,  nor  the  fact 
of  its  redeeming  its  notes  in  gold  or  silver,  which  gives  efficacy 
to  such  circulation  of  notes.  The  real  character  of  the  notes 
employed  in  any  transaction  can  seldom  be  known  to  the 
receiver ;  they  may  even  be  spurious,  yet  the  validity  of  the 
exchange  will  be  the  same.  He  that  sells  iron  for  bank-notes, 
and  with  the  notes  purchases  flour,  has  exchanged  his  iron  for 
flour,  let  what  may  bo  the  character  of  the  notes.  To  make  the 
transaction  complete,  it  is  only  necessary  that  the  party  receiv 
ing  the  notes  for  iron  should  know  that  they  will  be  received 
without  hesitation  for  flour.  Whatever  may  be  the  real  value 
or  character  of  the  bank-notes,  so  long  as  the  parties  exchanging 
merchandise  continue  to  make  them  the  medium,  so  long  will 
their  commerce  proceed  without  hindrance.  The  exchange  of 
goods,  in  any  particular  instance,  could  not  indeed  be  more 


BANK  NOTES  —  A  MODE  OF  ADJUSTMENT.  239 

effectual  if,  instead  of  notes,  gold  itself  had  been  used.  "We  do 
not  allege  that  the  medium  is  a  matter  of  indifference,  nor 
recommend  that  worthless  rags  should  be  employed  for  that  pur 
pose  ;  but  we  show  that  it  is  not  the  genuineness  of  the  notes, 
nor  their  convertibility,  nor  the  solvency  of  their  issuers,  that 
gives  validity  to  the  sales  of  which  they  are  the  medium.  What 
is  necessary  to  be  done  to  secure  the  confidence  of  the  public  in 
bank-notes,  so  that  they  may  the  better  perform  the  functions 
we  have  described,  and  prevent  the  abuse  of  over-issues  by  the 
banks,  is  matter  of  separate  consideration. 

The  view  which  we  desire  to  present  here  is  simply  that  the 
exchange  of  the  iron  for  the  flour  is  not  essentially  dependent 
on  the  actual  goodness  of  the  notes  used  as  a  medium.  The  iron 
may  be  sold  for  a  promissory  note,  and  that  note  given  for  the 
flour ;  or,  the  iron  merchant  may  simply  charge  the  flour  mer 
chant  in  his  books  for  the  value  of  the  iron,  and  be  charged  him 
self  for  the  flour ;  and  when  these  books  are  settled  and  balanced, 
the  reciprocal  payment  will  be  as  effectual  as  if  gold,  or  silver, 
or  bank-notes,  or  any  other  medium  had  been  employed. 

In  one  aspect  of  this  circulation  of  bank-notes  they  operate 
like  counters  or  tickets ;  they  are  issued  in  discount  of  paper 
given  for  goods,  they  are  carried  to  the  vicinity  of  banks,  and 
paid  for  goods  to  persons  who  deposit  them  in  bank,  receiving  a 
credit  on  the  books  instead;  the  banks  receiving  each  other's 
notes,  exchange  them,  and  being  thus  acquitted  of  each  other, 
they  owe  only  to  their  depositors,  and  this  indebtedness  to  the 
depositors  is  liquidated  by  the  deposits  being  used  to  pay  and 
withdraw  the  discounted  paper.  This  is  the  channel  in  which  a 
vast  portion  of  the  bank-notes  run ;  but  they  are  not  confined  to 
this  course,  and  therefore  run  into  a  thousand  channels,  ever 
varying  with  the  diversities  of  trade,  and  the  schemes  and  whims 
of  men. 

But  useful  and  efficient  as  bank-notes  are  in  various  ways,  one 
of  which  —  the  saving  in  the  wear  of  coin  —  we  have  not  men 
tioned,  there  is  a  limit  to  their  power ;  or,  rather,  other  modes 
of  payment  have  been  devised  and  extensively  employed,  of 
superior  efficiency.  We  find  that  the  circulation  of  bank-notes 


240  DIMINISHED     USE    OF    BANK-NOTES. 

in  Great  Britain,  and  in  this  country,  has  kept  pace  neither 
with  the  increase  of  banks,  nor  with  the  immense  enlargement 
of  business.  The  circulation  of  notes  by  the  Bank  of  England 
reached,  for  the  first  time,  the  sum  of  twenty  millions  sterling  in 
1806.  In  1817  it  reached  twenty-nine  and  a  half  millions  ;  but 
for  the  whole  period  the  average  is  but  little,  if  any,  above 
twenty  millions.  This  is  remarkable,  if  the  immense  progress 
of  Great  Britain  in  commerce,  agriculture  and  manufactures  be 
taken  into  account.  It  cannot  be  doubted  that,  if  bank-notes 
were  employed  now  as  in  1806  and  in  1817,  it  would  require 
forty  millions  from  the  Bank  of  England.  The  circulation  of 
1856  averaged  about  twenty  millions.  The  act  of  1844,  which 
was  restrictive  of  the  issue  of  notes,  may  have  tended  to  keep 
down  the  circulation ;  but  the  average  circulation  of  the  ten 
years  preceding  1844  was  considerably  under  twenty  mil 
lions.  It  is  obvious,  from  this,  that  the  proportion  of  bank 
notes  employed  in  Great  Britain  is  decreasing,  and  has  been 
for  fifty  years.  A  comparison  of  bank  returns,  in  this  country, 
for  the  last  twenty-five  years,  will  exhibit  a  similar  result.  As 
the  payments  occurring  in  the  business  of  Great  Britain  have 
increased  in  proportion  to  the  population  and  productive  indus 
try  of  that  country,  which  have  nearly  doubled,  it  is  evident 
that  other  modes  of  payment  or  adjustment  have,  to  a  large  ex 
tent,  taken  the  place  of  bank-notes.  That  which  has  been  most 
extensively  employed,  and  which,  to  the  greatest  extent,  sup 
planted  the  circulation  of  bank-notes  in  Great  Britain,  and  in 
the  United  States,  is  bank  credits,  which  operate  under  the 
name  of  bank  deposits.  A  very  large  proportion  of  the  indi 
vidual  paper  of  men  of  business,  in  the  United  States,  is  dis 
counted  by  the  banks  without  taking  the  form  of  bank-notes,  or 
being  included  in  the  circulation  of  the  banks.  The  proceeds  of 
the  discounted  paper  are  merely  placed  to  the  credit  of  the 
party,  and  take  their  place  as  deposits.  This  form  of  credit 
will  be  next  considered.1 

1  The  efficacy  and  power  of  bank-notes  as  a  currency  will  be  further  dwelt 
upon  in  the  Chapters  upon  the  Bank  of  England  and  the  banks  of  the 
United  States. 


CHAPTER    X. 

DEPOSITS    IN    BANKS. 

A  greater  facility  than  bank-notes  needful  for  large  operations  —  Banks 
become  the  reservoir  of  all  currency  not  in  actual  use  for  retail  trade  — 
This  constitutes  the  great  fund  employed  in  large  payments —  The  credits 
form  the  fund  out  of  which  debts  are  paid  —  Each  depositor  employs  his 
own  credits  to  pay  his  own  debts  —  All  the  credits  will  pay  all  the  debts  — 
The  deposits  are  virtually  a  system  of  accounts  kept  by  the  banks  for  their 
customers  —  Indebtedness  of  business  chiejly  mutual,  and  settled  by  set-off 
—  Demand  for  deposits — Circulation  —  Absorbed  by  the  banks  in  pay 
ments  of  discounted  paper — The  banks  give  credits  on  their  books  for 
paper,  and  receive  those  credits  in  payment. 

THE  concentration  of  payments  at  the  great  centres  or  entre 
pots  of  commerce  enables  the  banks  to  afford  another  facility  of 
payment  far  more  effective  and  important  than  bank-notes.  In 
the  large  payments  incessantly  going  on  at  these  points,  count 
ing  bank-notes  would  be  considered  a  serious  obstruction  to  busi 
ness  ;  and  keeping  them  on  hand  for  constant  use  would  be 
regarded  as  a  needless  risk,  burden  and  expense.  At  such 
places  merchants  and  others  keep  open  running  accounts  with 
one  or  more  banks,  depositing  bank-notes  and  money  as  fast  as 
received  to  the  credit  of  their  accounts;  thus  making  the  banks 
the  receptacle  or  reservoir  of  all  the  currency  and  money  not  in 
actual  use  for  the  operations  of  retail  trade.  The  banks,  in  this 
way,  absorb  a  very  large  portion  of  all  the  currency  in  circula 
tion.  These  deposits  in  the  principal  cities  greatly  exceed  in 
amount  the  circulation  of  the  banks,  and  their  operation  or 
working  is  far  more  efficient  and  active  than  that  of  the  bank 
notes.  One  effect  is  not  only  to  return  to  the  banks  immediately 
all  the  notes  not  required  for  circulation,  but  to  save  the  issue 
of  immense  sums.  When  individual  paper  is  discounted,  the 
16  (241) 


242  DEPOSITS  —  WHAT    THEY     CONSIST    OF. 

applicant,  instead  of  receiving  bank-notes,  takes  credit  for  the 
proceeds  in  his  deposit  account,  and  draws  upon  this  account  to" 
meet  his  maturing  payments.  The  paper  discounted  is  daily 
falling  due,  and  being  paid  by  checks  drawn  by  the  debtors  on 
their  bank  account.  The  banks  are  constantly  discounting 
newly-offered  paper,  thus  keeping  up  the  accounts  of  the  depo 
sitors.  While  these  accounts  are  continually  used  up  and  extin 
guished  on  one  side,  they  are  continually  renewed  and  extended 
at  the  other.  It  is  but  to  a  very  small  extent,  probably  not  one 
per  cent,  of  their  amount,  that  deposits  are  made  in  gold  or 
silver ;  they  consist  in  part  of  bank-notes  absorbed  from  the  cir 
culation,  but  chiefly  of  credits  granted  upon  the  discount  of  com 
mercial  paper.  The  credits  thus  granted  give  the  option  to  take 
bank-notes,  if  required ;  and  they  serve  not  only  to  pay  debts 
at  the  bank  at  which  the  account  is  kept,  but  at  other  banks  in 
the  vicinity.  This  of  course  leads  to  large  transactions  among 
the  banks.  Individuals  find  their  liabilities  scattered  through 
many  banks,  all  which  are  paid  by  checks  on  the  bank  in  which 
their  account  is  kept,  or  by  bank-notes  taken  up  by  check  for 
that  purpose.  Thus  all  the  discounted  paper,  and  all  individual 
notes  deposited  with  the  bank  for  collection,  are  paid  by  the 
working  of  these  deposits ;  the  bank  is  paid  in  its  own  notes,  in 
a  check  on  itself,  by  charging  the  debtor  in  account,  or  in  the 
notes  of  or  a  check  upon  another  bank.  Men  of  business  who  keep 
accounts  in  bank,  are  creditor  and  debtor  during  the  year  to  nearly 
the  whole  extent  of  their  business.  They  give  their  individual  paper 
as  evidence  of  debt  in  their  purchases :  they  take  paper  from 
others  for  the  amount  of  their  sales.  The  banks  discount  the 
paper  they  take,  and  demand  payment  of  the  paper  they  gave. 
The  banks,  in  effect,  keep  a  set  of  books  of  account  for  their  cus 
tomers,  in  which  they  are  credited  for  what  is  due  them  from 
others,  and  debited  for  the  amount  of  their  debts.  The  conve 
nience  and  advantage  of  these  books  may  be  better  understood 
if  we  notice  that  the  bank  does  not  merely  give  its  customer  a 
credit  for  the  amount  of  a  bill  or  note,  engaging  to  return  the 
same  bill  or  note  on  demand,  or  the  amount  when  collected.  It 
gives  an  open  credit,  which  enables  the  customer  to  draw  as 


HOW    EMPLOYED.  243 

occasion  requires  for  any  sum,  large  or  small,  within  the  amount 
of  the  credit.  In  this  shape  the  credits  of  a  customer  become 
perfectly  manageable  and  applicable  to  the  payment  of  his  debts 
as  they  mature  and  are  presented.  AVhat  is  done  for  one,  is 
done  for  all.  The  whole  amount  of  the  commercial  or  individual 
paper  discounted  at  the  banks  is  susceptible  of  being  employed 
in  this  very  effective  way.  The  banks  become  so  many  reser 
voirs  of  the  means  of  commercial  liquidation.  Notes  and  bills 
merely  lodged  for  safe-keeping  or  collection  would  afford  no 
advantage  to  be  compared  with  the  actual  process.  By  the 
mode  adopted,  the  whole  proceeds  of  all  the  commercial  paper 
discounted  is  constituted  a  fund,  which  being  drawn  upon  as 
required  by  checks,  becomes  more  convenient  and  effective  than 
money  in  discharge  of  debts.  By  a  .single  check,  the  work  of  a- 
moment,  any  sum  can  be  instantly  paid  with  its  minutest  frac 
tion.  That  which,  however,  gives  real  foundation  and  continuous 
efficiency  to  this  rapid  and  easy  mode  of  payment,  is,  that  this 
great  fund  mainly  belongs  to  those  who  are,  in  fact,  creditors  and 
debtors  of  each  other.  Each  individual  is  both  creditor  and 
debtor ;  and  the  chief  care  of  each  is  so  to  manage  his  credits 
as  to  make  them  available  in  discharge  of  his  debts.  This  depo 
sit  fund  is  a  vast  facility  for  this  purpose ;  it  is  a  safe  and  good 
fund  for  those  who  use  it,  because  it  safely  and  finally  dis 
charges  their  debts.  Gold  and  silver  can  do  no  more.  If  a 
merchant  owes  $100,000  in  various  sums,  upon  promissory 
notes,  to  divers  persons,  and  if  various  persons  owe  him 
§110,000  upon  notes  given  to  him,  he  can  in  no  way  be  more 
safely  or  legitimately  accommodated  than  by  being  enabled  to 
apply  $100,000  of  what  is  owing  to  him  in  discharge  of  the 
$100,000  he  owes.  For  this  purpose  it  is  obviously  not  neces 
sary  that  the  amounts  to  be  thus  employed  should  be  converted, 
or  even  be  convertible  into  money.  The  banks  merely  convert 
it  into  a  fund,  upon  which  the  parties  concerned  can  draw.  If 
a  merchant,  therefore,  who  has  $110,000  to  his  credit  in  bank, 
draws  upon  this  fund  for  $100,000,^  and  applies  it  in  payment 
of  that  amount  of  debt,  he  is  debited  the  amount,  and  his  debt 
is  acquitted.  The  fund  for  payments  thus  furnished  on  the 


244  FUND    FOR    PAYMENTS. 

books  of  the  bank  is  continually  replenished  by  constant  streams 
of  fresh  business  paper,  and  constantly  drawn  off  and  diminished 
by  the  amount  of  debts  paid.  Its  effect  is  to  enable  the  cus 
tomers  of  the  banks  to  set-off  their  credits  against  debts  with  more 
or  less  facility,  according  to  the  varied  circumstances  of  each 
case. 

The  business  or  commercial  paper  of  a  community  is  thus  con 
verted,  not  into  money,  but  into  a  fund,  the  amount  of  which 
and  all  the  dealings  in  it  are  expressed  in  money  of  account.  All 
are  willing  to  receive  payment  of  what  is  due  to  them  in  this 
fund,  because  with  it  each  one  can  pay  what  he  owes  to  others. 
No  more  acceptable  medium  of  payment  can  be  found  or  pro 
duced  than  that  which  will  pay  debts ;   for,   among  civilized 
people,  there  is  no  necessity  of  business  more  imperious  than 
the  payment  of  debts.    No  one  will  trouble  himself  to  exact  pay 
ment  of  what  is  due  to  him  in  gold  or  silver,  if  he  can  pay  the 
debt  he  owes  by  a  check  on  a  banker.     No  individual  can  desire 
a  greater  facility  for  payment  of  his  debts  than  that  of  applying 
to  that  purpose  the  debts  which  others  owe  to  him.  This  involves 
no  employment  of  the  precious  metals.     The  money  of  account, 
in  which  all  amounts  are  expressed,  is  common  to  creditors  and 
debtors,  and  understood  by  both.     What  one  person  can  do,  in 
applying  his  credits-  to  his  debts,  any  number  can  do.     Thus 
the  credits  become  the  fund  out  of  which  the  debts  are  paid  ; 
but   as   the    operating   parties    are   mainly  both    debtors    and 
creditors,  the  whole  payment  is  a  mere  process  of  adjustment  by 
which  those  concerned  balance  their  accounts.     It  is  quite  possi 
ble,  theoretically,  to  bring  the  mutual  claims  of  all  these  persons 
into  a  series  of  accounts  with  each  other  in  one  book,  and  thus 
balance  them,  without  checks  or  money,  or  any  so-called  deposit. 
The  banks  keep  open  accounts  with  each  other,  which  daily 
exhibit   the   operation    of  these   payments.      The   bank   upon 
which  its  customers  have  drawn  most  largely,  whether  in  notes 
or  checks,  will  fall  in  debt  to  the  others  accordingly ;  but  each 
will  be  able  to  present  claims  upon  the  others  in  proportion  to 
the  amount  it  has  received  in  checks  upon  them  or  their  notes. 
Each  will  be  found  to  stand,  in  regard  to  the  others,  a  debtor 


BANKS    AND    THEIR    CUSTOMERS.  245 

and  creditor.  These  amounts  are  adjusted  every  day,  once  in 
two  or  three  days,  or  as  convenience  may  dictate :  each  one  has 
a  balance,  favorable  or  unfavorable,  with  every  other ;  and  when 
their  accounts  are  settled,  the  whole  of  these  mutual  claims, 
except  the  balances,  are  paid  and  forever  extinguished.  Banks 
keeping  such  mutual  accounts  soon  learn  the  course  of  trade, 
and  are  able  to  regulate  their  business  with  reference  to  this 
mutual  indebtedness,  so  that  the  balances  fluctuate  but  little, 
and  the  amounts  to  be  paid  on  settlement  will  rarely  exceed  five 
per  cent,  of  the  sum  paid  off.  In  each  bank  the  same  process 
goes  on  between  individual  depositors  as  among  the  banks.  So 
far  as  there  are  mutual  claims  among  those  keeping  accounts  at 
the  same  bank,  they  will  be  settled,  however  complicated,  by 
the  working  of  the  deposit  account.  Each  customer  of  a  bank 
is  not  only  creditor  and  debtor  in  certain  amounts,  with  refer 
ence  to  his  whole  business,  but  he  is  debtor  and  creditor  in  cer 
tain  amounts  with  other  customers  of  the  same  bank.  So  far 
as  this  mutual  indebtedness  may  exist  between  the  customers  of 
the  same  bank,  their  debts  will  be  paid  by  check  on  the  bank, 
and  what  one  account  gains  another  loses  —  the  deposits  are 
neither  increased  nor  diminished.  The  bank  is  continually 
granting  credits,  which  go  to  swell  the  sum  of  its  deposits ;  and 
it  is  continually  receiving  payments  in  these  credits,  which  ex 
tinguishes  so  much  as  is  thus  received.  As  banks  receive  their 
own  notes  in  payment  of  all  dues  to  them,  so  to  the  same  effect 
they  receive  the  checks  on  themselves  of  any  of  their  depositors. 
The  deposit  is  very  rarely  of  coin  or  bullion,  or  other  article  of 
intrinsic  value ;  its  circulating  value  arises  from  the  fact  that, 
like  bank-notes,  it  will  make  purchases,  and  pay  debts.  We  have 
seen  that  the  demand  for  bank-notes  to  meet  bank  engagements, 
and  others  as  pressing,  is  stimulated  by  a  necessity  the  most  in 
exorable —  the  necessity,  among  merchants,  of  punctuality  in 
their  payments.  To  effect  their  payments,  merchants  spare  no 
anxieties,  labors,  nor  sacrifices.  This  is  the  practical  and  most 
powerful  support  of  the  issues  of  banks  of  circulation  ;  and  it 
applies  as  strongly  to  the  deposits  or  credits  granted  in  that 
shape,  as  to  the  notes  of  a  bank  —  the  deposits  being  far  more 


2 16  DEPOSITS    NOT    MONEY. 

employed  in  paying  debts  than  bank-notes.  A  man  may  refrain 
from  incurring  expenses,  to  pay  which  the  bank-notes  are 
usually  employed ;  but  he  cannot  refrain  from  paying  his  debts, 
even  when  he  has  neither  notes  nor  deposits,  unless  he  is  ready 
to  suffer  bankruptcy.  The  checks  upon  these  deposits  are, 
therefore,  as  good  payment  as  the  bank-notes,  not  because  they 
are,  like  them,  convertible  into  gold  or  silver,  but  because  they 
are,  like  them,  receivable  in  payment  of  debts.  Nearly  the 
whole  of  the  large  purchases  of  commerce  are  made  upon  pro 
mises  of  payment  at  a  future  day ;  whatever  is  receivable  for 
these  payments  must  be,  for  the  occasion,  as  desirable  as  gold 
or  silver ;  for  these  can  make  no  more  effectual  payment,  and 
are  far  less  convenient  and  safe. 

The  bank  deposits  are  the  grand  receptacle  of  all  the  funds 
not  needed  for  immediate  use,  and  of  the  large  sums  required 
for  the  heavier  payments  of  trade.  Being  composed  chiefly  of 
credits  granted  upon  the  discount  of  commercial  paper,  they  do 
not  spring  from  gold  or  silver,  they  do  not  turn  into  gold  or 
silver,  they  do  not  represent  gold  or  silver :  if  they  may  be  said 
to  represent  anything,  it  is  the  value  of  $ie  merchandise,  the 
sale  of  which  upon  credit  has  given  existence  to  the  mass  of  both 
bank-notes  and  bank  credits.  The  operation  of  deposits  is,  like 
that  of  bank-notes,  both  direct  and  circuitous.  The  gold  or  silver 
which  is  deposited  in  banks  to  credit  of  him  who  transfers  his 
ownership  by  check  continues  thus  to  circulate,  until  the  amount 
or  the  equivalent  is  withdrawn  or  paid  to  the  bank.  So  the 
credits  granted  upon  discount  of  individual  notes  may  be  trans 
ferred  without  limit  from  one  to  another,  each  time  making  a 
payment,  until  absorbed  by  the  constantly  recurring  demand  of 
the  bank  upon  its  customers.  Nine-tenths  of  the  amount  of  the 
deposits  in  our  banks  consist  of  their  own  notes,  and  of  the 
credits  granted  as  above ;  yet  all  blend  into  one  common  mass, 
and  effect  the  same  results  as  if  the  whole  deposit  had  been  gold 
or  silver. 

The  successful  operation  of  this  most  efficient  of  all  the  means 
of  payment  is  not  dependent  upon  the  actual  employment  of  the 
precious  metals,  coins  or  bullion.  It  neither  excludes  nor 


BANK    OF    NORTH    AMERICA.  247 

requires  them.  A  merchant  who  pays,  in  this  way,  to  the 
amount  of  half  a  million  yearly,  may  not,  altogether,  have  depo 
sited  a  thousand  in  coins.  The  amount  to  his  credit  is  constantly 
growing  by  receipts,  as  well  as  diminishing  by  payments.  The 
result  at  which  he  aims,  and  which  he  effects,  is  to  apply,  in  the 
progress  of  his  business,  the  proceeds  of  his  sales  to  the  payment 
of  his  purchases  ;  to  set-off  his  credits  against  his  debts.  Where 
the  creditor  and  debtor  are  depositors  in  different  banks,  the 
debts  are  paid  with  equal  facility,  their  payments  merely  leaving 
matter  for  adjustment  between  the  several  banks.  If  we  sup 
pose  that  all  the  business  men  of  Philadelphia  had  deposit 
accounts  in  the  Bank  of  North  America,  when  it  was  the  only 
bank  in  that  city,  the  adjustments  of  all  would  have  been  com 
pleted  on  the  books  of  that  bank.  Each  depositor  would  have 
to  pay  a  certain  amount  to  others  in  that  city,  and  others  in 
that  city  would  have  to  pay  a  certain  amount  to  him :  each  depo 
sitor  could  have  drawn  upon  his  account  for  money  deposited, 
and  for  the  proceeds  of  notes  discounted,  in  payment  of  his 
debts  as  they  matured-  If  we  suppose  that,  whilst  this  was  the 
only  bank  in  the  city,  there  were  1000  persons  who  were  thus 
creditors  to,  at  least,  the  average  amount  of  §10,000  each,  and 
debtors  to  at  least  the  same  sum ;  and  that  there  were  100  per 
sons  who  were  each,  in  like  manner,  creditor  and  debtor  to,  at 
least  the  sum  of  $100,000  ;  and  that  there  were  10  persons 
each,  in  like  manner,  indebted  §200,000  :  the  sum  of  this  in 
debtedness  would  be  $44,000,000  :  if  this  amount  were  run  off 
three  times  in  a  year,  it  would  make  a  total  of  $132,000,000,  or 
$11,000,000  for  each  month.  Whatever  course  might  be  taken 
in  regard  to  the  sums  or  balances  owing  beyond  this  mutual  in 
debtedness,  nothing  else  would  be  necessary  for  the  extinguish 
ment  of  this  large  sum  of  $11,000,000  each  month  than  draw 
ing  and  receiving  checks,  with  corresponding  entries  on  the 
books  of  the  bank.  Thus  would  be  extinguished  the  individual 
paper  discounted  by  the  bank,  corresponding  with  the  commer 
cial  transactions  which  had  given  rise  to  it.  For  goods  received 
the  depositors  had  issued  their  notes,  and  for  goods  delivered 
they  had  received  notes ;  and  all  these  had  been  discounted  by 


243  NATURE    OF    DEPOSITS. 

the  bank,  and  converted  into  a  fund  available  for  the  payment 
of  all,  because  it  would  be  of  the  very  same  nature  as  the  debts 
it  would  be  employed  to  pay.  The  bank  which  would  have  pur 
chased  all  these  notes  merely  with  credits  on  its  books,  would 
receive  these  credits  in  payment  when  the  period  of  maturity 
arrived.  We  may  attain,  perhaps,  a  more  distinct  idea  of  the 
effect  of  the  deposit  system  of  payment,  if  we  suppose  the  mer 
chants  in  a  city  without  banks  to  have  adopted  a  mode  of  pay 
ment  or  adjustment  of  this  kind.  Having  opened  an  office,  and 
appointed  their  agents  for  its  management,  they  deposited,  in 
stead  of  money  or  bank-notes,  simply  their  business  paper,  notes, 
and  bills  of  exchange,  receiving  credit  for  the  amount  in  the 
books  of  the  office,  less  the  interest  till  maturity.  A  fund  would 
be  thus  constituted  of  all  the  commercial  paper  of  the  city. 
When  a  note  or  bill  matured,  the  debtor  or  payer  would  simply 
draw  his  check  for  the  amount  to  be  paid,  and  thus  reduce  the 
sum  of  his  credit  so  much.  If  the  party  paying  had  not  credit 
on  the  books  to  a  sufficient  amount,  he  would  either  borrow  from 
those  who  had,  or  pay  the  deficiency  in  money.  It  will  be  noted 
that,  by  this  mode  of  adjustment,  the  sum  applicable  for  pay 
ment  would  exactly  correspond  to  the  amount  of  the  credits 
granted,  less  the  interest  or  discount,  which  would  have  to  be 
paid  in  money,  or  be  otherwise  arranged.  The  money  paid  in 
by  those  whose  credits  were  unequal  to  their  debts  would  go  to 
those  whose  credits  exceeded  their  debts ;  and  the  money  paid 
in  as  interest,  or  as  the  difference  between  the  proceeds  of  a  note 
and  its  face,  or  nominal  amount,  would  belong  to  the  office. 
Thus  this  business  would  close  and  balance  as  soon  as  all  the 
paper  matured ;  or  it  might  be  continued  at  pleasure,  the  new 
credits  being  granted  according  to  the  regular  progress  of 
business. 

We  have  supposed  deposits  thus  created  to  be  only  used  in 
payment  of  the  paper  which  gave  rise  to  them  ;  but  they  might 
be  employed  for  other  payments.  The  demand  for  them  to  pay 
the  paper  on  which  they  were  founded  would  be  urgent,  and 
would  proceed  from  the  holders  of  the  goods,  the  purchase  of 
which  gave  origin  to  the  paper  deposited ;  and  yet  there  might 


BALANCES    OF    TRADED  249 

be  intervals,  whilst  the  paper  was  maturing,  in  which  these  depo 
sits  could  be  freely  circulated  as  a  currency,  by  means  of  checks, 
throughout  a  whole  commercial  community.  Their  value  would 
be  undoubted,  because  the  demand  by  those  under  the  absolute 
necessity  of  obtaining  them  would  ensure  their  commanding  at 
all  times,  in  any  article  of  trade,  their  nominal  value.  These 
credits  would,  therefore,  circulate  just  as  the  deposits  of  a  bank 
circulate ;  for  if  the  debtors  in  these  deposit  accounts  should 
fail  to  secure  the  amount  of  deposit  required  to  meet  their 
engagements,  they  must  pay  in  money,  and  thus  furnish  the 
fund  to  repay  the  credits  or  deposits  when  demanded  by  those 
into  whose  hands  the  circulation  may  have  carried  them. 

A  very  efficient  circulation  of  deposits  might  be  originated 
and  kept  up  on  this  plan,  upon  the  basis  of  commercial  paper, 
continually  discharged  by  payment,  and  renewed  by  fresh  sup 
plies.  To  the  extent  of  the  direct  adjustment  or  set-off  of  debts 
between  the  parties  to  such  an  arrangement  —  that  is,  not  in 
cluding  the  circulation  of  which  we  have  just  spoken  —  the  whole 
result  may  be  attained  by  simply  opening  an  account  at  a  suit 
able  office,  and  charging  each  accountant  with  all  the*  notes  and 
bills  he  is  bound  to  pay,  and  crediting  him  with  all  he  produces 
against  others.  This  would  be  a  direct  set-off  of  each  one's 
credits  against  his  debts,  and  an  exhibit  of  balances  showing 
what  sum  each  one  had  to  receive  or  pay.'  The  whole  of  the 
equal  indebtedness  would  be  extinguished  at  once,  and  the  amount 
to  be  paid  on  the  debtors, balances  would  be  exactly  equal  to  the 
amount  to  be  received,  so  that  these  balances  paid  in  would  dis 
charge  the  whole.  The  course  of  trade  shows  that,  in  any  mer 
cantile  community,  these  balances  range  between  five  and  ten  per 
cent. ;  so  that,  in  adjusting  an  indebtedness  of  a  million,  the 
sum  of  the  balances  would  range  between  fifty  and  a  hundred 
thousand.  In  the  working  of  the  actual  deposit  accounts  of  our 
banks,  it  is  rare  that  these  balances  are  all  withdrawn  from 
bank ;  they  are,  in  part,  lent  by  the  holders  to  the  debtors  to 
meet  their  deficiencies ;  or,  being  allowed  to  remain,  their  accumu 
lation  enables  the  bank  to  extend  accommodations  to  those  whose 
balances  are  unfavorable.  In  process  of  a  few  months,  the 


250  RESULT    OF    DEPOSIT    SYSTEM. 

balances  greatly  change ;  many  of  the  debtors  and  creditors 
change  places.  The  system  of  adjustment  just  supposed  might 
be  continued  from  month  to  month,  or  year  to  year,  the  opera 
tion  of  the  book  entries  being  sufficient  to  effect  the  payments 
through  any  number  of  fluctuations. 

The  main  result  of  the  deposit  system,  as  now  managed  by 
our  banks,  is  a  mode  of  keeping  the  accounts  of  persons  who 
have  large  mutual  transactions.  This  will  be  more  apparent,  if 
we  suppose  another  mode  of  accomplishing  the  same  payments. 
Let  each  one  who  makes  a  sale  of  merchandise  charge  the  pur 
chaser  with  the  amount ;  and  when  he  makes  a  purchase,  let  him 
credit  the  seller  with  the  amount.  If  an  abstract  from  all  the 
books  of  those  who  would  otherwise  be  the  depositors  were  fur 
nished  for  the  purpose,  an  account  could  be  stated  with  each 
person,  showing  all  his  transactions,  exhibiting  the  resulting 
balances  and  the  amount  extinguished  among  the  whole.  The 
promissory  notes  and  bills  of  exchange  usually  employed  are 
evidences  of  debt  arising  upon  sales  of  merchandise  or  other 
transactions ;  the  abstract  of  entries  above  supposed  would  fur 
nish  evidence  of  the  same  debts,  susceptible  of  payment  in  the 
same  way. 

The  actual  system  of  payment  now  in  use  in  the  most  commer 
cial  nations  is  that  the  business  of  trade  —  that  is,  the  sales  and 
transfers  of  merchandise  —  proceed  ftmong  merchants  according 
to  their  convenience,  and  their  opinions  of  what  will  best  meet 
the  demands  of  consumers,  and  promote  their  own  interests. 
This  process  of  distribution  by  the  merchant  to  the  consumer  is 
based  mainly  upon  the  confidence  of  merchants  in  each  other. 
The  goods  arc  delivered  at  once  —  the  payment  is  deferred. 
The  goods  proceed  by  a  thousand  channels  to  their  final  desti 
nation  —  the  whole  business  of  payment  is  reserved  to  be  sepa 
rately  accomplished.  These  payments  are  effected  by  the  em 
ployment  of  separate  agencies,  professions,  institutions  and  hosts 
of  men ;  as  well  as  by  the  aid  of  books  of  account,  promissory 
notes,  bills  of  exchange,  bank-notes,  bank  deposits,  and  gold 
and  silver.  In  this  system  sometimes  one  way  is  best,  and  some 
times  another ;  sometimes  one  agency  or  agent,  and  sometimes 


CONCLUSION.  251 

another ;  sometimes  notes,  sometimes  checks,  sometimes  gold, 
and  sometimes  silver.  All  these  are  but  various  means  of  attain 
ing  an  end.  The  usage  is  always  to  employ  the  easiest  and 
least  expensive  mode  that  will  be  effectual.  It  happens  rarely, 
perhaps,  that  the  parties  paying  have  their  choice  of  all  the 
various  modes  of  payment ;  they  can  choose  only  among  the 
facilities  which  may  be  offered,  or  may  be  within  their  reach. 

Looking  at  the  whole  process  of  payment  in  any  commercial 
country,  it  presents  a  mass  of  details,  and  a  complication  of  pro 
cedure,  which  defies  the  hand  of  analysis,  or  the  eye  that  would 
pierce  through  the  whole.  It  cannot  be  understood  nor  described 
by  any  direct  examination :  various  attempts  to  do  this  have 
failed,  as  the  innumerable  treatises  upon  money  and  banking 
amply  prove.  Our  object  has  been  to  show  distinctly  the  end 
to  be  accomplished ;  to  exhibit  clearly  the  most  effective  pro 
cesses  of  payment ;  to  show  how  they  operate  singly,  and  in 
various  combinations ;  and  to  leave  each  reader  to  follow  these 
processes  as  far  and  as  faithfully  as  his  facilities  for  informa 
tion,  and  his  powers  of  observation,  may  carry  him. 


CHAPTER   XI. 

CLEARING-HOUSES. 

21.  The  Clearing-house  of  London  —  Private  'bankers  of  London — Con 
centration  of  payments  — Mutual  adjustment — Clearing-house — Mutuality 
of  debts  —  Processes  and  forms  at  the  Clearing-house  —  Example  of  clear 
ing —  Amounts  cleared  —  Bullion  Report  of  1810 —  Sir  Henri/  Thornton 
—  Relations  of  clearing  to  commerce  —  The  Banks  and  their  customers  — 
Payments  of  foreign  trade — Domestic  payments  of  special  districts — The 
Credit  System  —  New  channels  for  tlie  precious  metals. 

THE  vast  accumulation  of  payments  in  London  led  the  pri 
vate  bankers,  in  whose  hands  the  business,  or  a  large  proportion 
of  the  business  was  concentrated,  to  adopt  a  plan  for  economi 
zing  the  use  of  bank-notes,  for  saving  time  and  trouble,  which 
may  fairly  claim  to  be  one  of  the  highest  exhibitions  of  the 
power  of  the  credit  system.  The  country  merchants  and  bankers 
who  made  and  received  their  payments  in  the  metropolis,  kept 
their  accounts  with  these  private  bankers,  many  of  whom  had 
thus  committed  to  their  keeping  very  large  sums  of  money.  A 
great  average  balance  remained  in  their  hands,  the  use  of  which 
was  one  of  their  principal  sources  of  profit.  As  no  firm  with 
more  than  six  partners  was  allowed  to  issue  bank-notes  in  Lon 
don,  these  bankers  never  felt  themselves  able  to  compete  with 
the  Bank  of  England  in  that  department  of  banking :  issuing 
no  notes  of  their  own,  they  used  only  those  of  the  Bank  of 
England,  when  their  payments  required  the  use  of  notes.  They 
all  kept  accounts  with  their  customers,  and  immense  sums  were 
daily  paid  by  checks  and  transfers  on  their  books.  They  paid 
out,  when  required,  for  these  checks  the  notes  of  the  Bank  of 
England ;  and  weref  of  course,  obliged  to  keep  a  supply  con 
stantly  on  hand  for  that  purpose.  These  bankers,  besides  having 

(252) 


LONDON    BANKERS.  253 

to  pay  out  bank-notes  on  the  order  of  their  customers,  found 
themselves  daily  indebted  to  each  other  in  immense  sums  accru 
ing  from  the  system  of  concentration  which  has  been  noted. 
Each  banker  was  daily  receiving  from  his  country  correspond 
ents  drafts  and  bills  for  collection  and  discount,  payable  at  the 
counters  of  other  bankers ;  and  all  were  thus  daily  subjected  to 
heavy  demands  from  each  for  the  amounts  of  these  drafts  and 
bills. 

These  mutual  demands  were  greatly  increased  by  the  checks 
and  bills  and  drafts  of  city  customers :  so  that,  each  afternoon, 
every  banker  was  called  upon  to  disburse  large  sums  of  bank 
notes  to  every  other  banker.  Payments  were  to  be  made  and 
received  between  more  than  forty  banking  establishments ;  and 
this  process  necessarily  involved  the  daily  use  of  very  great  sums 
in  bank-notes,  or  the  keeping  a  heavy  deposit  account  with  the 
Bank  of  England.  This  would  have  required,  if  notes  were 
used,  a  large  proportion  of  the  actual  circulation  of  the  bank ; 
and,  of  course,  that  these  bankers  should  keep  this  large  amount 
in  that  disposable  form  which  would  prevent  their  making  any 
profit  upon  it.  Under  such  circumstances,  it  is  not  surprising 
that  the  active  minds  of  the  bankers  recurred  to  the  mode  of 
payment  which  we  are  about  to  describe.  It  is  not  now  my  pur 
pose  to  examine  the  steps  by  which  they  perfected  the  institu 
tion  of  the  Clearing-house,  but  only  to  exhibit  its  uses  and 
powers,  as  a  means  of  payment  or  liquidation,  as  managed  in 
the  state  of  perfection  to  which  it  has  been  now  brought. 

Every  man  who  purchases  and  sells,  who  receives  payments 
and  makes  payments,  finds  at  the  end  of  the  year  a  balance  for 
or  against  himself  on  the  whole  year's  transactions,  small,  how 
ever,  in  comparison  with  the  sum  of  all  his  dealings.  If  he  takes 
credit  for  all  his  purchases,  and  gives  it  on  all  his  sales,  he  may 
apply  his  credits  to  his  debts,  and  thus  extinguish  both;  and 
that  would  be  perfectly  practicable,  if  his  purchases  and  sales 
are  made  with  the  same  person.  It  would  be  only  balancing 
their  books  of  account.  If  he  deals,  however,  with  a  great  many 
different  persons,  both  in  purchasing  and  selling,  and  gives  and 
takes  credit  in  every  transaction,  he  has  only  to  call  in  his 


254  THE    LONDON    CLEARING-HOUSE. 

credits,  and  with  the  proceeds  pay  his  debts ;  but  this  is  imprac 
ticable  in  the  complications  of  business,  unless  by  means  of  cir 
culating  credits,  such  as  bills  of  exchange,  promissory  notes, 
deposit  accounts,  and  bank-notes.  The  concentration  of  pay 
ments  at  London  arose  out  of  this  mutual  interchange.  Very 
large  sums  were  to  be  paid  daily,  and  these  daily  payments 
were  an  adjustment  of  the  accounts  between  parties  who  had 
been  both  buyers  and  sellers.  One  class  of  merchants  have 
large  sums  coming  to  them,  but  they  owe  heavy  amounts  to 
others  ;  hence  an  immense  accumulation  of  mutual  demands.  If 
all  these  had  met  at  one  banker's,  a  very  large  proportion  would 
have  been  extinguished  at  once  upon  his  books.  Each  banker, 
however,  being  for  the  time  owner  of  all  committed' to  his  care, 
the  process  of  adjustment  was  modified.  All  mutual  claims 
meeting  upon  each  banker's  books  were  extinguished  there,  and 
the  bankers  became  creditors  and  debtors  of  each  other  for  all 
the  credits  and  debts  of  their  customers  which  had  not  met  and 
been  settled  by  the  parties,  creditor  and  debtor,  being  customers 
of  the  same  bank ;  and  this  very  large  indebtedness  was  that 
which  was  intended  to  be  adjusted  and  paid  at  the  Clearing 
house.  Its  mode  of  liquidation,  however,  deserves  more  par 
ticular  mention. 

In  the  old  post-office  building  in  Lombard-street,  London,  is, 
or  was,  an  apartment  devoted  to  the  business  of  the  Clearing 
house.  This  establishment  is  kept  up  for  the  benefit,  and  at  the 
expense,  of  certain  private  bankers  in  the  metropolis,  who  are 
associated  for  that  purpose.  As  the  institution  implies  a  very 
considerable  degree  of,  mutual  confidence,  it  consists  only  of 
such  as  have  chosen  to  enter  into  the  mutual  arrangement.1 
Two  inspectors  are  appointed  to  preside  over  the  process,  to  pre 
vent  mistakes,  and  to  authorize  the  payment  of  balances.  Each 
banker  has  his  drawer  or  box  in  the  clearing-house,  and  each 
one  or  more  clerks,  who  carry  thither,  at  several  stated  hours 
on  every  day,  all  the  claims  which  his  house,  up  to  that  time, 


1  It  has  recently  admitted  into  its  circle  many  institutions  formerly  ex 
cluded,  especially  the  joint-stock  banks. 


THE    LONDON    CLEARING-HOUSE.  255 

has  on  all  the  rest.  The  respective  clerks,  after  charging  them 
on  their  balance-sheets,  drop  into  the  drawers  of  each  house  all 
the  claims  upon  it.  This  process  is  continued 'until  four  o'clock 
in  the  afternoon.  Then  each  clerk  finishes  a  balance-sheet, 
which  he  had  commenced  and  carried  on  as  the  claims  were 
deposited.  They  are  provided  with  alphabetical  printed  lists  of 
the  clearing  bankers,  with  columns  ruled  for  debtor  on  the  left, 
and  creditor  on  the  right  side.  Each  clerk  puts  the  name  of  his 
own  house  at  the  top  of  his  sheet,  which  exhibits,  when  finished, 
the  balance  which  his  house  owes  to  others,  and  what  others  owe 
to  it.  The  summing  up  at  the  foot  of  tbe  debtor  side  shows  how 
much  his  house  owes  altogether,  and  that  on  the  creditor  side 
how  much  all  owe  to  it ;  and  the  balance  between  these  totals 
shows  how  much  his  house  is  to  pay  or  to  receive.  This  amount 
each  clerk  is  enabled  to  make  up  by  a  constant  inspection  of  the 
drawer  of  his  house,  where  he  finds  the  claims  against  it  as  they 
come  in,  Every  bill  or  check  has  the  name  of  the  banker  or 
firm  to  which  it  belongs  written  across  its  face,  thus  indicating 
to  whom  the  amount  must  be  credited.  They  keep  a  minute  of 
the  claims  upon  every  house  as  they  deposit  the  evidences  in  the 
drawers,  and  thus  are  enabled  to  make  a  balance  with  each,  and 
transfer  it  to  their  balance-sheet,  by  the  hour  of  four  o'clock, 
when  no  further  entries  are  permitted.  They  then  compare  their 
balances,  which  must  agree,  or  there  is  error.  If  there  is  a 
balance  due  by  one  house  to  another,  it  must,  if  right,  be  the 
very  sum  which  that  house  claims. 

After  their  balance-sheets  are  all  made  up  and  verified  by 
comparison,  the  inspectors  make  up  from  them  a  general  balance- 
sheet,  by  debiting  each  bank  with  all  it  owes,  and  crediting  it 
with  all  the  others  owe  to  it.  The  balance  to  be  paid  by  each 
bank  is  placed  on  the  same  line  with  what  it  owes,  in  a  column 
on  the  debtor  side  :  the  balance  to  be  received  by  each  bank  is 
placed  on  the  same  line  with  its  credits  on  the  creditor  side. 
This  general  balance-sheet  further  verifies  the  individual  balance- 
sheets,  as,  if  all  is  correct,  the  sum  of  the  debtor  and  creditor 
columns  will  be  equal,  and  the  sum  of  the  balances  to  be  received 
and  paid  will  be  equal.  It  will  show  at  a  glance,  too,  what  each 


256 


THE    LONDON    CLEARING-HOUSE. 


creditor  bank  is  to  receive,  and  each  debtor  bank  to  pay.  We 
subjoin  a  specimen  of  the  general  balance-sheets,  omitting  frac 
tions.  In  the  "  Supplement  to  the  Report  on  Banks  of  Issue," 
made  in  1841,  may  be  found,  at  page  320,  a  table  of  the  daily 
payments  at  the  Clearing-house  for  every  day  of  the  year  1839. 
The  balances  paid  in  bank-notes  for  that  year  averaged  about 
seven  per  cent,  of  the  whole  sum  paid. 


DEBTORS. 

NAMES  OF  THE 
BANKERS. 

CREDITORS. 

Amounts. 

Balances  to  be, 
paid. 

Amounts. 

Balances  to  be 
received. 

£280,000 
80,000 
110,000 
50,000 
50,000 
110,000 
110,000 
50,000 
280,000 
100,000 
110,000 
280,000 
150,000 
200,000 
150,000 
80,000 
160,000 
50,000 
40,000 
60,000 
150,000 
80,000 
60,000 
40,000 
110,000 
60,000 

£20,000 
5,000 
10,000 
10,000 
5,000 

Barclay 

£260,000 
75,000 
100,000 
40,000 
45,000 
120,000 
120,000 
45,000 
260,000 
90,000 
115,000 
300,000 
160,000 
215,000 
140,000 
85,000 
165,000 
55,000 
45,000 
65,000 
135,000 
90,000 
65,000 
45,000 
100,000 
65,000 

Barnard.  .    . 

Barnctt 

Bosauquel 

Brown 

Carries 

£10,000 
10,000 

Dennison  

5,000 
20,000 
10,000 

Fuller 

Qlyn 

Han  bury    . 

Hankey  
Jones    .... 

5,000 
20,000 
10,000 
15,000 

Lubbock  

10,000 

Prescott  
Price 

5,000 
5,000 
5,000 
5,000 
5,000 

Robarts  

Rogers. 

Spooncr  

15,000 

Smith 

Stone  

10,000 
5,000 
5,000 

Vere 

Weston  

10,000 

Williams 

Willis  

5,000 

£3,000,000 

£120,000 

£3,000,000 

£120,000 

The  balances  being  all  compared  and  found  to  agree,  each  house 
pays  at  once  into  the  clearing-house  the  general  balance  which 
it  owes ;  and  as  the  whole  sum  to  be  paid  must  be. precisely  the 
sum  to  be  received,  any  one  who  owes  may  pay  to  any  one  who 
is  to  receive.  The  sums  thus  paid  are  acquitted  in  notes  of  the 
Bank  of  England,  except  the  fractions  of  balances  under  five 
pounds. 


THE    LONDON    CLEARING-HOUSE.  257 

Mr.  Thomas,  one  of  the  inspectors  of  the  clearing-house,  stated 
before  the  bullion  committee,  in  1810,  that  the  average  pay 
ments  effected  daily  in  the  establishment  amounted  to  .£4,700,000, 
and  that  the  average  daily  amount  of  bank-notes  required  to 
pay  the  balances  was  £220,000,  but  sometimes  the  balances 
were  equal  to  £500,000.  On  settling  days  at  the  stock  ex 
change,  the  amount  of  payments  at  the  clearing-house  were 
stated  to  reach  £14,000,000.  If  we  take  the  former  sum, 
£4,700,000  (§22,500,000),  as  the  amount  more  strictly  belong 
ing  to  commerce,  we  have  a  weekly  payment  of  §135,000,000, 
a  monthly  payment  of  §586,000,000,  and  a  yearly  payment  of 
$7,040,000,000;  and  all  this  effected  with  the  use  of  less  than 
five  per  cent,  of  the  amount  in  bank-notes.  The  Clearing-house 
had  then  been  in  operation  for  thirty-five  years,  and  during  the 
twelve  years  before  1810,  the  immense  payments  above  indicated 
had  been  made  without  the  use  of  gold  or  silver,  or  any  metallic 
money  of  any  kind,  and  by  the  aid,  for  payment  of  balances,  of 
bank-notes  not  redeemable  in  coin ;  of  bank-notes  not  redeem 
able  in  anything,  and  only  receivable  at  the  bank  whence  they 
were  issued  in  payment  of  debts,  or  on  deposit.  All  these  great 
payments  were  in  addition  to  those  effected  at  the  Bank  of  Eng 
land,  at  the  counters  of  the  private  bankers,  and  by  the  aid  of 
bank-notes  out  of  doors  in  the  current  payments  of  trade,  and 
those  made  on  account  of  the  public  treasury.  It  is  probable 
that,  in  the  year  1810,  these  together  exceeded  the  amount 
acquitted  at  the  clearing-house  many  times ;  perhaps  not  less 
than  §75,000,000  were  then  daily  paid  in  London  without  the 
use  of  gold  or  silver,  or  bank-notes  exchangeable  for  these 
metals. 

The  business  of  the  Clearing-house  has  not,  we  believe,  in 
creased  in  proportion  with  the  increase  of  the  general  business 
of  England.  The  deposits  of  the  Bank  of  England  now  gene 
rally  average  £20,000,000.  If  these  deposits  were  moved  on 
the  average  once  in  each  week,  which  is  not  a  violent  presump 
tion,  as  immense  sums  change  hands  several  times  in  a  day, 
this  would  make  the  payments  at  the  bank  over  £1,040,000,000 
for  the  year.  It  is,  perhaps,  equally  safe  to  say  that,  in  all  other 
17 


258  ECONOMIZING    COIN. 

banks,  an  equal  movement  of  deposits  takes  place  in  the  current 
payments  of  business  ;  the  two  sums  making  the  vast  amount  of 
£2,080,000,000.  This  added  to  the  yearly  payments  of  the 
Clearing-house,  makes  a  total  of  £3,000,000,000,  equal  to 
§1,440,000,000,000.  The  working  of  the  deposits  in  Scotland 
and  Ireland  wrould  greatly  increase  this  vast  aggregate. 

The  Clearing-house  had  not  been  the  subject  of  much  remark 
until  the  Bullion  Committee  of  1810  examined  one  of  its  in 
spectors,  and  devoted  a  half-page  (see  page  252)  of  their  report 
to  a  statement  of  his  evidence.  It  has  since  been  noticed  by  not 
a  few  continental  writers  of  repute,  and  also  by  many  in  Great 
Britain.  Previous  to  that  time  Henry  Thornton,  Esq.,  had 
spoken  of  the  establishment  in  a  note  near  the  end  of  the  third 
chapter  of  his  very  excellent  work  on  "Paper  Credit"  in  which, 
after  a  few  remarks  explaining  its  mode  of  operation,  he  says : 
"  This  device,  which  serves  to  spare  the  use  of  bank-notes,  may 
suggest  the  practicability  of  a  great  variety  of  contrivances  for 
sparing  the  use  of  gold,  to  which  men  having  confidence  in  each 
other  would  naturally  resort,  if  we  could  suppose  bank  paper 
to  be  abolished." 

How  strange,  that  he  who  so  well  understood  how  and  why 
paper  credit  was  substituted  for  gold  and  silver  in  commerce, 
did  not  perceive  and  appreciate  more  fully  the  fact  that  the 
Clearing-house  was  an  institution  founded  on  the  necessity  of 
saving,  besides  time  and  trouble,  not  merely  gold,  but  even  cur 
rency.  Bank-notes,  although  a  vastly  more  convenient  medium 
of  payment  than  even  gold  coin,  were  yet  not  to  be  had  without 
an  equivalent  in  value;  and  it  became,  in  the  estimation  of 
bankers  and  merchants,  important  to  save  the  use  of  them. 
They  were  an  expensive  article  to  keep  on  hand,  and  it  became 
needful  to  ascertain  how  far  they  could  be  dispensed  with  in 
payments. 

It  is  far  too  confined  a  view  of  the  operations  of  the  Clearing 
house  to  regard  them  as  a  mere  adjustment  between  the  bankers 
concerned.  The  banks  no  doubt  lend  their  own  capital  as  far  as 
it  goes ;  but  their  chief  business  is  dealing  in  the  commercial 
paper  of  their  customers.  Every  man  of  business  using  credit 


CREDITS    AND    DEBITS.  259 

largely  finds  himself,  in  its  progress,  creditor  for  the  paper  he 
takes,  and  debtor  for  the  paper  he  gives.  If  these  credits  and 
debts  were  compared  once  a  month,  once  in  three  months,  or 
once  a  year,  there  would  be  found,  perhaps,  no  large  balance 
either  way.  When  such  a  person  sends  all  his  credits  to  a  bank, 
it  is  chiefly  that  he  may  obtain  facilities,  in  managing  these 
credits,  to  make  them  available  in  paying  debts.  He  appears, 
therefore,  on  the  books  of  the  bank  in  which  he  keeps  his 
account,  as  a  creditor  for  the  amount  others  owe  him  ;  but  those 
who  are  his  creditors  for  the  amount  of  the  paper  issued  by  him 
have  also  their  accounts  in  the  same  bank,  or  in  others.  Each 
individual  is  able,  by  these  open  accounts,  in  the  manner  already 
explained  in  the  chapter  on  deposits,  to  apply  his  credits  to  the 
payment  of  his  debts  as  they  mature.  If  all  kept  their  accounts 
in  the  same  bank,  the  credits  and  debits  of  all  would  appear  on 
the  same  books,  and  the  clearing  would  be  done  on  these  books. 
But  as  there  are  many  banks,  and  the  customers  divided  among 
them,  the  banks  resort  to  the  expedient  of  the  Clearing-house, 
which  makes  them  one  for  the  very  purpose  of  which  we  are 
speaking.  The  claims  presented  by  each  bank  at  the  office  of 
the  Clearing-house  are  merely  the  claims  of  its  customers ;  but 
these  customers  are  met,  at  the  Clearing-house,  with  all  the  claims 
against  them  maturing  on  that  day.  Thus,  every  day,  the  vast 
multitude  of  business  men  who  are  customers  of  these  clearing 
banks  have,  by  the  operation  of  this  clearing  process,  their  debts 
and  credits  balanced  and  extinguished  as  effectually  as  though 
they  had  met  in  the  same  bank,  and  on  the  same  books. 

By  this  process  the  customers  of  the  banks,  although  they  do 
not  pay  the  notes  or  paper  issued  or  accepted  by  them  until  it 
matures,  are  enabled,  by  the  facility  afforded  by  the  banks, 
to  anticipate  the  maturity  of  the  paper  which  is  payable  to  them. 
The  parties  keeping  accounts  with  one  of  these  banks,  and 
having  their  notes  on  time  discounted,  have  a  fund  upon  which 
to  draw  to  meets  their  payments  as  they  mature.  They  draw 
upon  the  deposit  fund  —  the  proceeds  of  discounted  paper  —  for 
the  amount  of  these  payments,  and  the  bank  takes  up  the  ma 
tured  paper  as  it  appears  at  the  Clearing-house.  The  bank  is 


260  THE    LONDON    CLEARING-HOUSE. 

reimbursed  when  the  discounted  paper  is  paid  in  money,  or  by 
the  return  of  the  credit  it  gave  for  the  paper.  As  all  these 
banks  are  engaged  in  the  same  business,  and  as  their  customers, 
whether  country  banks  or  individuals,  remain  very  much  the 
same,  the  result  of  the  whole  is  that  this  machinery  of  banks 
and  bank  accounts,  and  the  processes  of  the  Clearing-house, 
enable  their  customers  one  and  all  to  apply  their  credits  to  pay 
their  debts,  without  the  intervention  of  money.  To  the  extent 
that  their  customers'  credits  and  debts  are  equal,  they  can  be 
paid  and  extinguished  by  liquidation,  or  set-off,  in  the  manner 
we  have  described;  but  so  far  as  any  individual  has  more  coming 
to  him  than  he  owes,  or  owes  more  than  he  has  coming  to  him, 
so  far  a  balance  would  arise  to  be  settled  in  money  or  bank 
notes.  Of  course  the  sums  to  be  thus  paid  would  together  be 
the  very  amounts  to  be  received ;  and  the  sum  of  the  balances 
thus  due  from  individuals  would  be  the  amount  of  bank-notes  to 
go  each  day  to  the  creditor  banks.  The  amount  of  the  daily  clear 
ing,  then,  exhibits  the  amount  to  which  the  mutual  claims  of  all  the 
customers  of  the  banks  are  equal ;  and  the  sum  of  all  the  daily 
balances  is  the  sum  of  the  amounts  payable  to  certain  customers 
of  the  banks,  and  the  sum  of  the  amounts  which  certain  other 
customers  have  to  pay.  These  balances  are  the  only  amount  which 
is  payable  in  money  at  the  Clearing-house,  and  for  this  payment 
notes  of  the  Bank  of  England  are  always  employed.  In  the  year 
1839,  according  to  a  Parliamentary  Report  of  1841,  the  whole 
amount  of  the  clearings  was  ,£954,401,600,  or  over  £3,000,000 
for  each  day ;  the  whole  sum  of  the  balances  for  the  year  was 
£66,275,600.  The  highest  sum  cleared  in  any  month  was 
£87,610,500  in  August,  and  the  lowest  £70,833,800  in  Decem 
ber.  The  largest  sum  of  balances  was  £6,348,500  in  January, 
and  the  smallest  £4,755,000  in  December.  Thus,  for  the  year 
1839,  the  customers  of  the  Clearing-house  paid  oft*  debts  among 
themselves  to  the  amount  of  £954,401,600,  a  sum  far  exceeding 
the  national  debt  of  Great  Britain,  without  any  use  of  gold  or 
silver,  and  with  only  £66,276,600  in  notes  of  the  Bank  of  Eng 
land.  To  the  extent  of  £888,125,000,  the  debts  of  these  par 
ties  were  mutual  and  equal,  and  the  operations  of  their  bank 


THE    LONDON    CLEARING-HOUSE.  261 

accounts  balanced  and  extinguished  them ;  and  to  that  extent 
commodities  had  paid  for  commodities.  The  effect  was  the  same 
as  if  the  same  parties  had  kept  the  whole  accounts  on  their 
own  books  of  account,  and  had  balanced  them  as  occasion  re 
quired. 

This  clearing  operation  among  .the  banks  is,  then,  one  of  the 
most  effective  of  the  various  devices  of  the  credit  system  to 
economize  the  use  of  money  :  for  this  vast  amount  of  debt, 
equal  to  $ 4,500,000,000,  was  paid  in  a  year  without  the  use  of 
a  single  coin.  So  far  as  the  Clearing-house  operations  extend,  the 
result  is  nearly  complete.  It  is  effected  through  more  compli 
cations  than  are  absolutely  necessary,  but  the  great  fact  is  mani 
fest,  that  a  sum  equal  to  the  national  debt  of  Great  Britain  has 
been  paid,  without  employing  in  that  payment  one  pennyworth 
of  gold  or  silver.  This  result  has  been  reached  by  a  very  simple 
principle  —  the  making  provision  for  men  to  apply  their  credits 
to  the  payment  of  their  debts.  Unassisted  —  that  is,  without 
some  special  arrangement  for  the  purpose  —  men  cannot  set-off 
their  credits  against  their  debts;  but  with  proper  management, 
it  can  be  done  with  even  more  facility  than  through  the  London 
bankers  and  the  Clearing-house.  As  two  men  mutually  indebted 
upon  book  accounts  can  balance  and  extinguish  their  debts,  so 
two  men,  holders  of  each  other's  promissory  notes  or  accept 
ances,  can,  so  far  as  they  may  be  equal,  off-set  them  and  thereby 
extinguish  so  much  debt ;  so  two  banks,  mutually  indebted  upon 
the  notes  of  each  held  by  the  other,  can  pay  and  discharge  their 
respective  debts  to  each  other ;  so  can  any  number  of  individuals 
or  banks.  It  is  simply  needful  that  persons  indebted  be  pro 
vided  with  a  mode  of  applying  their  credits  to  the  payment  of 
their  debts.  This  process  is  susceptible  of  great  variety  in  the 
means,  and  of  very  wide  application.  It  is  upon  this  principle 
that  the  payments  of  foreign  trade  have  long  been  effected.  If 
the  United  States  and  Great  Britain  have  mutually  exported  to 
each  other  commodities  to  the  value  of  $100,000,000,  the  amount 
is  adjusted  by  the  familiar  process  of  bills  of  exchange.  He 
who  has  exported  commodities  to  the  value  of  $10,000,  is  paid 
when  he  sells  a  bill  for  the  amount.  The  adjustment  proceeds 


262  RESULTS    OF    CLEARING. 

afterwards  without  any  further  trouble  on  his  part.  The  bills 
are  concentrated  in  a  few  hands  in  each  country.  If  a  house 
in  London  purchase  in  each  week  a  million  of  dollars  of  Ameri 
can  paper,  and  a  house  in  New  York  with  which  it  is  in  business 
relations  purchases  a  million  of  dollars  each  week  in  bills  on 
London,  it  is  easy  to  see  that  it  requires  no  money  to  pay  to 
each  other  the  two  millions.  As  business  is  generally  conducted, 
the  bills  are  forwarded  from  this  country,  and  the  respective 
claims  are  balanced  and  extinguished  on  the  books  of  the  Lon 
don  house. 

What  is  thus  done  so  readily  between  nations  is  effected  with 
equal  facility  between  the  different  parts  of  the  same  country, 
wherever  there  is  a  mutual  trade.  It  takes  place  in  the  United 
States  between  North  and  South,  and  East  and  West,  and  be 
tween  our  chief  commercial  and  manufacturing  cities,  to  a  total 
amount  probably  five  times  greater  than  the  sum  of  our  foreign 
trade.  This  great  sum,  so  far  as  it  is  equal,  is  balanced  by  the 
processes  of  our  domestic  exchange  on  the  books  of  our  banks 
and  brokers.  Coin  is  only  used  where  there  are  large  balances 
to  pay,  as  in  the  foreign  trade.  The  large  payments  of  the 
United  States  in  a  year  greatly  exceed  $10,000,000,000,  and 
the  balances  paid  in  coin  would  not  ordinarily  reach  one  per 
cent,  of  that  sum. 

The  credit  system  has  thus  accomplished  the  great  result  of 
separating  the  actual  sale  and  delivery  of  commodities  —  the 
actual  transactions  of  commerce  from  the  payments.  The  pro 
gress  of  civilization  and  private  integrity  have  made  this  possi 
ble  ;  its  immense  advantage  is  such  as  not  only  to  secure  its  con 
tinuance,  but  to  make  it  a  very  strong  safeguard  of  commercial 
honesty.  Almost  the  entire  commerce,  foreign  and  domestic,  of 
the  whole  civilized  world  is  now  carried  on  from  day  to  day,  and 
year  to  year,  with  much  less,  we  believe,  than  one  per  cent,  of 
the  actual  values  exchanged  in  coin  or  bullion.  The  whole  of 
the  prices,  sales,  bargains,  books  of  account,  notes,  and  bills  of 
exchange,  are  expressed  in  money  of  account ;  and  the  whole 
processes  of  adjustment  by  bankers,  brokers,  and  clearing 
houses,  are  all  stated  and  expressed  in  money  of  account. 


ECONOMY    OF     CLEARING.  263 

The  credit  system,  then,  intervenes  with  its  various  devices 
of  books  of  account,  promissory  notes,  bills  of  exchange,  bank 
notes,  bank  deposits,  clearing-houses,  &c.,  to  enable  the  parties 
who  have  bought  and  sold,  who  are  all  creditors  and  all  debtors, 
to  liquidate  their  debts  and  credits,  and  thus  extinguish  them  so 
far  as  they  are  equal ;  that  is,  where  a  merchant  has  to  receive, 
during  the  year,  $200,000,  and  to  pay  $190,000,  the  credit  sys 
tem  adjusts  the  whole  sum  of  $390,000  by  paying  the  $10,000 
difference  in  money,  and  extinguishing  the  $380,000  by  set-off, 
or  liquidation.  The  goods  which  go  out  of  the  manufactory  or 
warehouse  pay  for  those  which  come  in.  The  difference  only  re 
quires  money.  To  effect  the  exchange  with  advantage,  laborers, 
Corses,  warehouses,  wagons,  drays,  canal-boats,  railways,  and 
ships  are  employed ;  to  effect  the  payments,  gold  and  silver  for 
the  balances,  bills  of  exchange,  promissory  notes,  bank-notes, 
banks,  bankers,  and  all  the  devices  of  books,  checks,  and  clear 
ing  or  balancing  accounts,  are  requisite. 

The  economy  of  these  means  of  making  payments  is  scarce 
less  than  that  enjoyed  by  commerce  in  the  means  of  transporta 
tion  above  mentioned.  To  make  the  daily  payments  of  the 
clearing-houses  in  gold  would  require  some  three  or  four  hun 
dred  tellers ;  in  silver,  an  army  of  some  thousands,  with  a  vast 
number  of  drays,  carts  and  laborers  for  its  removal.  The  cost 
of  keeping  on  hand  such  a  quantity  of  the  precious  metals  would 
be  enormous  for  the  interest  alone,  besides  all  the  extra  expense 
of  tellers,  clerks,  and  assistants.  To  save  this,  the  machinery  of 
credit  is  put  in  motion,  and  payments  are  effected  as  we  have 
described.  What  a  nation  imports,  it  pays  for  by  what  it  ex 
ports  ;  what  a  district  receives  for  its  consumption,  it  pays  for 
by  what  it  furnishes  for  the  consumption  of  others ;  and  what 
an  individual  merchant  purchases  in  the  way  of  his  business,  he 
pays  for  by  what  he  sells  in  the  way  of  his  business.  When 
coined  money  is  used  in  these  transactions,  they  can  only  be 
carried  on  to  the  extent  that  such  money  can  be  obtained  for  the 
purpose,  and  with  that  speed  at  which  money  may  be  made  to 
circulate ;  but  when  credit  in  its  various  forms  is  used,  then  this 
business  finds  no  limit  but  the  limit  of  human  industry  in  pro- 


264  CLEARING    PROCESSES    EXTENDED. 

ducing,  and  human  power  in  transportation  and  distribution, 
and  human  integrity  in  the  subsequent  processes  of  payment. 

Such,  however,  is  the  magnitude  of  the  transactions  of  modern 
commerce,  that  fuller  employment  is  given  to  a  much  larger 
stock  of  the  precious  metals,  in  paying  occasional  balances,  than 
was  formerly  given  when  a  large  proportion  of  the  payments 
were  made  in  coin  or  bullion.  So  full  is  this  employment,  that 
it  may  be  said  that  all  the  commercial  business  which  is  now 
done  without  the  aid  of  the  precious  metals  in  the  payments,  is 
so  much  of  an  addition  to  what  would  be  done  if  they  were  ex 
clusively  employed. 

There  cannot  be  a  doubt  that  new  modes  of  economizing 
money  will  yet  be  devised,  and  ttyat  the  power  of  the  credit  sys 
tem  will  continue  to  be  enlarged,  and  its  processes  perfected,  until 
much  of  the  friction  which  is  now  felt  in  the  business  of  pay 
ments  will  be  removed.  We  may  hereafter  indicate  a  method 
of  effecting  some  beneficial  improvements  in  that  respect. 

It  is  true  that  the  credit  system  is  not  without  its  difficulties 
and  obstructions ;  its  contrivances  have  not  always  been  happy ; 
its  devices  have  not  always  been  successful ;  and  the  needless 
friction  is  sometimes  terrible.  That,  however,  is  less  the  fault 
of  the  credit  system  than  of  those  who  undertake  to  point  out 
its  laws,  and  to  manage  its  concerns.  It  is  demonstrable  as 
any  problem  in  mathematics,  that  if  men  were  as  honest  as  they 
should  be,  and  as  knowing  as  they  might  be,  a  commerce  greater 
than  the  world  has  ever  seen  might  be  carried  on  by  the  sole 
use  of  well-devised  and  well-managed  institutions  of  credit. 

We  have,  however,"  to  regard  the  subject  in  its  connections 
with  men  as  we  find  them  now,  and  as  they  are  likely  always  to 
remain ;  and  while  imperfection  and  selfishness  are  such  striking 
characteristics  of  humanity,  we  shall  find  them  displayed  in  their 
worst  forms  in  the  management  of  property  and  credit.  The 
machinery  of  the  credit  system  can  only  be  so  far  perfected  as 
the  interests  of  those  who  employ  it  will  permit. 


BANKING    IN    SCOTLAND.  265 


I  2.  Clearing  between  the  banks  of  Scotland  —  Clearing  twice  a  week  — 
Balances  payable  in  exchequer  bills,  notes  of  the  Bank  of  England,  or  gold 
—  Banks  of  Scotland  —  Tlieir  system  of  deposit,  and  its  influence  upon 
business — Stimulus  to  punctuality  and  industry — Circulation  of  bank 
notes  in  Scotland — One  pound  notes. 

The  banks  of  Scotland  have  a  well-organized  system  of  clear 
ing,  or  exchanges,  among  themselves,  which  takes  place  twice 
a  week  alternately,  at  the  Bank  of  Scotland  and  the  Royal 
Bank  in  Edinburgh.  The  payments  are  made  in  exchequer  bills, 
Bank  of  England  notes,  or  gold,  at  the  option  of  the  payer;  but 
if  these  are  wanting,  in  drafts  on  London  at  ten  days.  Exche 
quer  bills  are  chiefly  used,  the  Bank  of  England  notes  being 
only  used  to  pay  the  fractional  parts  of  X1000.  The  sum  of 
£400,000,  in  exchequer  bills,  is  apportioned  among  the  nine 
banks  associated ;  and  it  is  agreed  that  this  whole  sum  shall  be 
kept  in  the  circle,  by  each  one  keeping  up  its  proportion  of  the 
allotted  amount.  The  process  of  clearing  is  simply  charging  on 
the  clearing-books  each  bank  with  its  own  debts,  and  crediting 
it  with  its  own  credits.  Each  has  a  large  amount  to  pay,  and  a 
large  amount  to  receive,  and  a  balance  to  pay  or  receive.  This 
clearing  includes  not  only  all  the  mutual  claims  arising  among 
the  banks,  by  drafts,  collection  of  bills  of  exchange  and  promis 
sory  notes,  deposit  receipts,  and  checks,  but  also  the  claims 
arising  to  each  bank  upon  the  notes  of  the  others  received  in  the 
course  of  business.1  The  clearing  and  payment  of  the  balances 
completely  adjusts  all  claims  twice  in  each  week ;  the  whole  mu 
tual  indebtedness,  however,  of  the  Scotch  banks  does  not  enter 
into  this  clearing.  The  banks  in*  any  one  town  or  city  generally 
settle  among  themselves,  and  give  four  days'  drafts  on  Edinburgh 
for  the  balances  which  are  adjusted  at  the  clearing.  This  sys 
tem  of  clearing  is  by  no  means  perfect,  but  it  is  scrupulously 
well-managed,  and  made  a  most  important  feature  in  the  wisely- 
conducted  banking  system  of  Scotland.  There  is  no  country 
where  there  is  more  reliance  upon  banks,  and  none  where  they 
have  more  powerfully  stimulated  the  productive  forces  of  the 

1 II.  Report  of  1841,  Banks  of  Issue,  Interrogatory,  1G83. 


266  BANKING    IN    SCOTLAND. 

people.  We  cannot  but  remark,  that  whilst  there  are  strong 
objections  to  the  theory  of  the  Scotch  banks,  their  constitution 
secures  a  very  safe  and  prudent  management.  In  fact,  they 
have  been  conducted  for  a  century  and  a  half  with  almost  un 
equalled  discretion  and  success.1 

The  working  of  the  deposits  of  the  Scotch  banks  is  probably 
not  exceeded  in  efficiency  by  any  equal  amount  of  deposits,  and 
the  amount  is  probably  greater  than  elsewhere  in  proportion  to 
the  capital  of  the  banks.  The  system  of  cash  credits,  one  of  the 
chief  characteristics  of  their  banking,  consists  virtually  in  giving 
to  their  customers  a  certain  amount  of  deposit,  upon  which  they 
draw  at  pleasure,  and  upon  the  operations  of  which  an  interest 
account  is  kept.  The  customer  is  thus  deeply  interested  to  return 
the  amounts  drawn  by  him  with  as  little  delay  as  possible ;  and 
the  movements  of  the  deposit  accounts  are,  consequently,  rapid. 
The  banks  in  Scotland  regulate  the  amount  of  these  cash  credits 
by  the  actual  business  of  the  country,  and  by  the  effect  upon 
their  circulation.  The  bank  which  perceives  increasing  indebted 
ness  to  other  banks,  or  a  great  reduction  of  deposits,  is  warned 
to  contract  operations.  So,  if  the  banks  collectively  find,  by 
their  accounts  at  the  clearing,  that  their  general  indebtedness  is 
swelling  beyond  their  usual  means  of  payment,  they  are  warned 
that  their  customers  are  over-trading.  Whilst  the  people  of 
Scotland  are  trading  strictly  among  themselves,  and  within  due 
bounds,  their  payments  must  be  susceptible  of  easy  adjustment 
upon  the  books  of  the  banks  by  the  circulation  of  bank-notes, 
the  settlements  between  banks,  and  the  Edinburgh  exchanges. 
In  a  wholesome  state  of  trade  or  production,  merchants  and  pro 
ducers  sell  to  an  amount  as  great  as  they  purchase :  the  amount 
they  have  to  pay  is  no  greater  than  they  have  to  receive.  The 
bank  or  cash  credits  are  used  in  the  purchase  of  goods,  which, 
being  sold,  furnish  the  means  of  repayment.  There  is  no  over 
trading,  financially  speaking,  among  individuals,  so  long  as  their 

1  Since  the  above  was  written,  a  most  unhappy  case  of  bank  failure  has 
occurred  at  Glasgow.  But  Scotland  has  less  to  answer  for,  in  the  way  of 
bank  frauds,  than  any  country  in  the  world  which  has  derived  so  much 
advantage  from  banks. 


LARGE    DEPOSITS.  267 

sales  are  equivalent  to  their  purchases ;  and  the  payments  to  be 
made  through  the  banks,  in  such  a  business,  will  create  no  undue 
indebtedness  among  the  banks.  There  is,  in  like  manner,  no 
difficulty  in  the  payments  of  any  city  or  district,  so  long  as  its 
business  furnishes  claims  upon  others  equivalent  to  those  which 
are  presented  against  it.  If  Scotland  exports  to  an  amount 
equal  to  her  imports,  there  will  be  no  inconvenient  payments  to 
be  made  in  London  to  cover  a  deficiency.  So  long  as  the  trade 
between  individuals,  districts  or  cities  and  Scotland,  and  between 
the  rest  of  the  world  and  Scotland,  runs  nearly  even,  the  banks 
find  their  adjustments  easy  and  safe.  The  safety  and  efficiency 
of  the  Scotch  system  of  banking  consists  in  its  exhibiting  to  its 
managers  the  real  state  of  trade,  and  in  its  showing  clearly  the 
relation  between  the  course  of  trade  and  the  operations  of  the 
banks.  The  books  of  the  banks  keep  the  accounts  of  the  whole 
trade  of  Scotland ;  each  bank  represents  so  many  individuals  as 
are  its  customers,  and  so  far  as  its  customers  have  mutual  deal 
ings  with  each  other,  their  mutual  claims  meet  and  are  settled 
upon  the  books  of  the  bank ;  and  so  far  as  the  claims  of  its  cus 
tomers  lie  against  those  who  are  customers  of  other  banks,  it 
must  present  those  claims  against  the  bank  at  which  they  be 
come  payable.  So  that,  in  fact,  the  goods  are  moved  and  dis 
tributed,  and  bought  and  sold  in  the  regular  course  of  trade,  as 
best  subserves  the  interests  and  wishes  of  those  concerned ;  the 
payments  are  made  in  the  banks  by  that  process  of  adjustment 
to  which  we  have  adverted.  The  friction  of  this  machinery  of 
payment  is  so  little,  that  the  progress  of  industry  and  produc 
tion  in  Scotland,  under  its  favoring  assistance,  has,  during  the 
last  century,  had  no  parallel  in  Europe. 

It  is  a  striking  feature  of  the  Scotch  system,  that  it  not  only 
dispenses  with  the  precious  metals  to  a  remarkable  degree,  as  a 
matter  of  economy  and  facility,  but  also  of  bank-notes  to  a  very 
great  extent,  as  other  facilities  can  be  found  which  are  superior. 
It  is  estimated  that  the  ordinary  deposits  in  the  banks  in  Scot 
land  amount  to  £30,000,000.  If  the  whole  sum  is  moved  but 
once  each  week,  it  effects  the  enormous  sum  of  £1,560,000,000 
of  payments  in  a  year.  The  whole  bank-note  circulation  of 


268  ONE-POUND    NOTES    OF     SCOTLAND. 

Scotland  seldom  exceeds  £3,500,000,  or  only  one-ninth  of  the 
deposits ;  whilst  the  circulation  of  the  Bank  of  England  is  gene 
rally  larger  than  its  deposits.  The  superiority  of  the  Scotch 
system  is  fully  shown  in  this  double  economy  of  coin  and  notes. 
That  this  economy  is  the  result  of  their  system  of  management 
is  apparent  from  the  fact  that  banking  is  free,  and  that  there 
was  no  restriction  upon  the  issue  of  notes  until  the  Act  of  1844, 
which  only  restricted  them  to  the  amount  shown  to  be  required 
by  their  business  on  the  average  of  several  years. 

In  England,  coins  are  used  for  payments  below  <£5 ;  in  Scot 
land,  <£!  notes  form  over  two-thirds  of  their  currency  ;  and  yet, 
in  Scotland,  the  whole  circulation  of  notes  is  not  greater,  in  pro 
portion  to  the  population,  than  in  England.  It  is  now  not  far 
from  one 'pound  to  each  person;  but  if  £1  notes  were  issued  in 
England,  it  is  believed  that  £30,000,000  would  be  quickly  taken 
into  the  circulation,  which  would  make  two  pounds  to  each  per 
son.  It  is  rather  rare  to  see  gold  coins  in  Scotland;  their  <£! 
notes  almost  supply  the  place  of  sovereigns.  That  the  people 
are,  in  this  respect,  well  satisfied  is  apparent  from  the  steady 
determination  with  which  they  defend  their  one-pound  currency 
against  the  jealous  attacks  of  English  currency-mongers.1 

1  See  the  celebrated  letters  of  Walter  Scott,  on  the  currency  of  Scotland, 
under  the  nom  du  guerre  of  Malachi  Malagrowther ;  II.  Report  of  1841, 
Banks  of  Issue,  Appendix. 


DOMESTIC    EXCHANGE.  269 


$  3.  Bank  adjustment  in  the  United  States  —  Clearing  between  the  banks 
in  the  United  States  —  Mutual  accounts  and  correspondence  —  Separation 
of  sale  and  distribution  of  goods  from  payments  —  Domestic  exchange  — 
Balances  of  home  trade —  The  correspondents  of  banks  their  mode  of  clear- 

'  ing  —  Mutual  debts  the  basis  of  this  adjustment —  The  system  of  clearing 
among  the  banks  of  New  England  at  the  Suffolk  Bank  of  Boston. 

In  the  United  States,  the  clearing  or  liquidation  among  the 
banks  of  all  mutual  claims,  except  those  arising  from  their  circu 
lation,  is  mainly  accomplished  on  their  ledgers,  and  by  their  cor 
respondence.1  There  is  a  constant  necessity  for  this  corre 
spondence,  arising  from  the  mutual  transmission  of  drafts, 
checks,  promissory  notes,  bills  of  exchange,  &c.,  for  collection. 
Upon  these  collections  a  large  portion  of  their  mutual  demands 
arise.  It  cannot  be  necessary  to  particularize  that  every  city  or 
district  of  country,  as  a  whole,  must  have  claims  upon  others, 
and  must,  as  a  whole,  be  indebted  to  others.  These  mutual  de 
mands  are  entrusted  to  the  banks  for  collection ;  or,  what  is  the 
same  in  the  view  now  taken,  these  claims  are  purchased  by  the 
banks,  and  collected  for  their  own  account.  In  this  country 
these  payments  are  made  through  the  agency  of  the  banks 
almost  wholly ;  for,  when  exchange  brokers  and  merchants  inter 
vene  in  the  business,  they  generally  employ  the  banks  in  some 
stage  of  the  process.  In  this  way  the  payments  arising  upon 
the  trade  between  the  East  and  the  West,  the  North  and  the 
South,  and  among  the  great  cities  on  the  seaboard,  are  made 
upon  the  books  of  the  banks.  Whatever  sum  is  received  for 
account  of  any  bank  by  another,  is  credited  accordingly,  and 
whatever  is  drawn  for  is  charged;  so  every  transaction  of  debtor 
and  creditor  is  made  an  item  of  book  account,  which  runs  on 
from  year  to  year,  being  balanced  as  often  as  necessary  to  make 
out  the  balance-sheet,  or  state  of  the  bank.  So  far  as  the  respec 
tive  charges  and  credits  balance  each  other,  their  mutual  in 
debtedness  is  paid,  and  the  claims  held  by  the  customers  of  the 

1  Since  this  was  written,  clearing-houses  have  been  established  in  Phila 
delphia  and  New  York,  of  which  some  notice  will  be  taken  in  the  Chapter 
on  the  Banks  of  the  United  States. 


270  DOMESTIC    EXCHANGE. 

one  bank  against  the  customers  of  the  other  are  discharged. 
The  effect  is  the  same  as  if  the  accounts  had  been  kept  directly 
between  them ;  the  bank  has  acted  as  their  book-keeper.  This 
adjustment,  however,  among  banks  has  a  wider  and  more  com 
plex  operation,  as  carried  on  among  a  number  of  banks.  One 
bank  may  have  on  its  books  accounts  with  one  hundred  other 
banks,  and  each  of  the  hundred  may  have  accounts  with  as  many 
other  banks.  These  circles  of  banks  keeping  mutual  accounts 
may  be  ramified  over  the  whole  country,  running  from  the  far 
North  to  the  extreme  South,  and  from  the  East  to  the  far  West. 
The  operation  is  the  same  in  affording  a  facility  to  every  creditor 
to  present  his  claim  against  his  debtor  through  the  banks,  and 
to  every  debtor  to  make  payment  in  the  same  way.  The  banks 
in  this  business  may  be  taken  as  representing  the  locality  in 
which  they  are  severally  situated,  and  as  holding  the  credits  or 
claims  of  their  customers  upon  all,  however  distant,  with  whom 
they  dealt :  so  they  respectively  stand  ready  to  receive,  from 
their  immediate  customers,  whatever  they  owe  to  all  others. 
This  is  the  domestic  exchange  of  the  country.  The  goods  have, 
by  the  action  of  merchants  and  others,  been  bought,  sold,  and 
distributed  according  to  the  course  of  trade,  and  the  demands 
of  consumption ;  the  payments  are  reserved  for  the  agency  of 
banks  or  bankers.  Each  locality,  or  commercial  district,  is  cre 
ditor  for  what  it  has  sent  into  the  market,  and  a  debtor  for  what 
it  has  purchased.  The  commercial  paper  to  which  this  commerce 
has  given  rise  is  remitted  to  the  banks,  and  thus  every  bank 
will  take  credits  for  the  exports  of  its  district,  and  apply  those 
credits  to  meet  the  claims  upon  that  district  for  its  imports. 
These  domestic  payments  are,  then,  effected  upon  the  books 
of  the  bank,  as  already  stated ;  and  as  such  accounts  must  con 
tinue  to  run,  even  the  balances  may  remain  to  be  adjusted,  from 
time  to  time,  according  to  the  course  of  trade,  and  the  corre 
sponding  course  of  payments.  These  balances  may  be  trans 
ferred  to  any  part  of  the  United  States  by  mutual  checks,  drafts, 
«fec.,  among  the  banks ;  so  that  a  vast  adjustment  of  balances  must 
take  place  among  the  banks,  besides  the  accounts  to  which  the 
immediate  transactions  of  their  customers  give  rise. 


MUTUAL    BANK    ACCOUNTS.  271 

This  adjustment  is  readily  accomplished  by  mutual  checks,  if 
the  trade  has  been  sound  and  equal ;  if  not,  it  may  be  necessary, 
at  some  point,  to  pay  ultimate  balances  in  coin.  The  banks  in 
the  West  may  fall  largely  in  debt  to  those  of  the  East  for  goods 
purchased  for  Western  consumption ;  but  that  debt  may  be  paid 
by  drafts  of  the  banks  of  New  Orleans  upon  the  Eastern  banks, 
the  market  of  New  Orleans  being  that  at  which  a  large  portion 
of  the  customers  of  the  Western  banks  make  their  chief  sales. 
So  the  banks  of  other  districts  may  become  indebted  in  heavy 
balances  to  other  banks ;  but  they  can  meet  this  indebtedness 
by  large  credits  to  which  they  may  be  entitled  elsewhere. 

The  result  of  these  bank  accounts,  and  the  correspondence  by 
which  they  are  kept  up,  is  the  same  as  if  they  all  had  a  common 
clearing-office,  at  which  each  should  be  debited  and  credited 
with  all  they  had  to  pay,  and  all  they  had  to  receive.  Each 
bank  account  would  then  be  similar  to  the  clearing  accounts  of 
each  banker  at  the  office  in  London.  The  effect  of  the  whole 
proceeding  in  our  banks  is,  that  the  liquidation  of  the  domestic 
exchanges  —  the  payments  resulting  from  the  domestic  trade  — 
is  accomplished  on  the  bank  ledgers,  and  the  balances  are  dis 
tributed  according  as  the  parties  are  entitled.  It  will  be  noted 
that,  taking  the  whole  of  any  series  of  transactions,  the  amount 
to  be  paid  is  the  same  as  that  to  be  received ;  they  are,  of 
course,  equal.  The  balances,  however,  result  differently  at  dif 
ferent  times ;  and  there  is  a  continual  transfer  of  funds  taking 
place,  by  which  balances  are  paid  by  one  party  at  one  time,  and 
received  by  the  same,  perhaps,  at  another.  So  far,  however,  as 
in  this  business  the  banks  have  as  much  to  receive  as  to  pay, 
their  credits  are  equal  to  their  debits ;  and  their  books  suffice  to 
effectuate  a  mutual  discharge  between  them,  and  a  final  liquida 
tion  among  their  respective  customers. 

The  banks  also  keep  large  deposits  with  each  other,  as  their 
position  and  the  nature  of  the  trade  among  their  customers  may 
require.  It  is,  therefore,  found  to  be  an  advantage  for  some 
banks  to  make  actual  deposits  with  others,  for  which  they  are 
credited  in  account  as  for  sums  collected  or  received  in  any 
other  way.  They  also  draw  and  are  drawn  upon  by  each  other, 


272        EXCHANGES  OF  NEW  ENGLAND. 

both  for  their  own  adjustments,  and  at  the  instance  of  indi 
viduals  ;  all  which  goes  to  their  respective  accounts,  and  to 
swell  the  sum  of  the  domestic  exchanges  liquidated  on  the  books 
of  the  banks.  The  advantage  and  facility  of  this  mode  of  adjust 
ment  is  greatly  increased  by  other  modes  of  operating  between 
banks  at  a  distance,  by  which  remittances  to  remote  points  are 
made  easy  and  prompt. 

It  is  by  these,  and  similar  means,  that  the  payments  arising 
upon  the  commercial  operation  of  distributing  to  their  proper 
customers  the  cotton,  sugar,  and  other  products  of  the  South  — 
the  pork,  beef,  tobacco,  and  others  of  the  West  —  the  manufac 
tured  fabrics  of  the  North  —  and  the  various  articles,  manu 
factured  and  imported,  of  the  cities  of  the  seaboard,  are  achieved. 
These  payments  are  effected  neither  by  gold,  nor  silver,  nor 
bank-notes.  The  goods  are  made  to  pay  for  the  goods.  Money 
of  any  kind  is  not  only  unnecessary  in  such  operations,  but  an 
actual  and  serious  impediment  and  hindrance.  The  larger  pay 
ments  are  thus  made,  and  with  the  more  facility,  because  the 
number  engaged  is  smaller ;  as  the  business  of  distribution 
widens,  and  more  persons  take  part,  it  becomes  necessary,  under 
the  present  system,  to  make  use  of  bank-notes,  and  occasionally 
of  coins. 

A  system  of  exchanges  prevails  among  the  banks  of  New 
England,  which  may  be  cited  as  another  illustration  of  the  opera 
tion  of  clearing.  It  is  too  frequently  regarded  as  merely  a  mode, 
on  the  part  of  the  banks,  of  redeeming  that  portion  of  their  cir 
culation  which  accumulates  at  Boston.  It  is,  however,  a  more 
important  arrangement  than  such  a  description  suggests.  Boston 
being  the  chief  centre  of  trade  for  these  States,-  a  very  large 
portion  of  the  bank-notes  flow  into  the  banks  of  that  city ;  and 
it  is  a  great  convenience  to  have  these  notes  redeemed  in 
such  manner  as  to  save  all  expense  and  time  in  sending  them 
home  to  the  issuers.  That  motive  was  most  influential  in  intro 
ducing  the  plan ;  and  with  the  country  the  operating  motive  in 
keeping  up  the  process  was  the  security  it  afforded  against  over 
issues  by  such  banks  as  were  disposed  to  abuse  their  powers, 
and  because  it  further  secured  to  every  bank  that  amount  of 


SUFFOLK    BANK    SYSTEM.  273 

circulation  to  which  its  legitimate  business  gave  it  a  title.  But 
the  effect  of  the  arrangement  was  more  important  than  this  con 
venience,  or  this  security,  indicated.  It  furnished  a  knowledge 
of  their  respective  strength ;  it  gave  a  steadiness  of  movement, 
an  increased  power  of  accommodation  to  the  business  commu 
nity,  their  customers,  which  was  of  mighty  advantage  to  the 
industry  and  trade  of  the  whole  region.  This  plan  originated 
in  an  agreement  among  the  banks  in  Boston,  by  which  a  certain 
sum  furnished  by  the  others  was  lent,  free  of  charge,  to  the  Suf 
folk  Bank;  in  consideration  of  which  that  bank  undertook  to 
receive  from  the  others  all  their  country  bank-notes,  and  send 
them  home  for  payment,  or  arrange  with  the  issuers  for  their 
redemption.  The  Suffolk  Bank  succeeded  in  making  an  arrange 
ment  with  the  country  banks,  by  which  all  their  indebtedness  at 
Boston  is  settled  at  that  bank.  Of  course  this  involved  large 
operations.  The  quantity  of  manufactured  goods  sent  by  the 
interior  to  Boston  is  immense;  and  the  value  of  the  cotton,  wool, 
iron,  flour,  pork,  beef,  and  other  domestic  products,  and  of  the 
foreign  goods  offered  for  sale  at  Boston,  taken  into  the  country, 
must  also  be  immense.  Very  much  the  largest  portion  of  this 
trade  must  be  carried  on,  in  the  first  instance,  by  the  individual 
paper  of  the  respective  purchasers.  To  a  very  great  extent,  the 
paper  given  by  the  merchants  of  Boston  for  the  products  of  the 
interior  is  set-off,  in  this  adjustment  at  the  Suffolk  Bank,  against 
the  paper  given  by  the  country  merchants,  manufacturers,  and 
dealers,  for  their  purchases  in  Boston.  However  this  paper  may 
be  negotiated  or  circulated,  both  parties  rely  on  the  goods  they 
purchase  to  take  up  the  paper  they  give  for  them ;  and  the 
respective  claims  are  either  held  by  the  banks,  and  balanced  on 
their  books,  or,  if  they  have  been  exchanged  for  bank-notes, 
these  are  exchanged.  The  various  banks  of  Boston,  according 
to  their  position,  and  as  their  convenience  or  interests  may  dic 
tate,  settle  among  themselves  a  Vast  amount  of  indebtedness ; 
but  all  that  does  not  readily  come  within  the  scope  of  these 
minor  adjustments  is  carried  into  the  great  liquidation  at  the 
Suffolk  Bank.  In  this  way  not  merely  the  debts  which  the 
country  owes  to  Boston,  and  those  which  Boston  owes  to  the 
18 


274  BANKS    OF    DEPOSIT. 

country,  are  settled,  but  New  Haven  and  Hartford  present  their 
claims  upon  Portsmouth  and  Bangor  at  Boston,  and  so  the  latter 
upon  the  former.  The  Suffolk  Bank  not  only  calls  upon  others 
to  pay,  but  must  also  pay  to  others.  The  business  is  resolved 
into  a  general  adjustment  of  accounts.  In  the  long  list  of  banks, 
each  one  is  debtor  and  creditor :  the'  list  of  the  debts  exactly 
balances  the  credits ;  but  separately  some  fall  in  debt,  and  some 
have  balances  to  receive ;  and  as  the  balances  owing  are  the 
same  as  those  to  be  received,  being  in  fact  the  same  thing,  those 
owing  have  only  to  pay  into  the  Suffolk  Bank  their  adverse 
balances,  to  be  handed  over  to  those  holding  favorable  balances, 
and  the  whole  liquidation  is  made. 

In  this  operation,  vast  as  it  is,  there  is  only  occasional  need 
of  gold  or  silver,  and  no  use  made  of  bank-notes,  except  to 
redeem  them.  In  the  great  and  direct  movements  of  domestic 
exchange,  by  which  cities  and  districts  settle  for  their  mutual 
purchases,  the  chief  agency  is  the  books  of  banks,  and  into 
these  books  the  whole  business  finds  its  way ;  the  operation  is 
completed  with  but  small  aid  from  either  coin,  bullion  or  bank 
notes.  The  latter  enter  more  largely  into  the  business,  because 
they  are  issued  for  circulation,  and  arc  thus  used  until  they 
arrive  in  banks  which  employ  them  as  a  set-off  against  their 
own.  It  is  not  necessary,  however,  for  the  successful  accom 
plishment  of  this  business,  that  the  banks  which  conduct  it 
should  be  anything  else  than  banks  of  deposit  and  discount, 
without  specie,  and  without  the  powrer  to  issue  notes.  In  this 
case,  the  only  change  in  the  business  would  be  that  the  place  of 
the  notes  would  be  supplied  by  checks  and  drafts.  The  parties 
who  receive  and  deposit  the  notes  would  draw  upon  their  debtors 
for  the  same  amount,  and  receive  it  through  the  banks,  thereby 
giving  to  the  deposit  banks  the  same  amount  of  claims  upon 
each  other  as  the  notes  would  give  to  banks  of  circulation.  It 
is  not  intended  to  say  that  the  notes  are  not  the  most  conve 
nient,  but  simply  that  this  great  discharge  of  mutual  obligations 
is  not  dependent  on  them  for  efficacy.  Other  means  of  effecting 
it,  with  even  superior  facility  and  economy,  may  yet  be  found. 


CHAPTER   XII. 

FAIRS. 

Commercial  Fairs —  Their  agency  in  commerce  —  Continued  on  the  confines 
of  Asia  and  Europe  —  Kiachta  —  Nijni  Novgorod  —  Kief —  Concentra 
tion  of  payments  —  .Pairs  of  Lyons  —  Payments  of  Lyons  —  Mode  of  pre 
paration  —  The  opening  —  Mode  of  conducting  —  Viramen  de  partie  —  Set- 
ting-off  debts — Payment  of  balances  —  Results  —  Rationale  —  Illustrations 
—  The  Fairs  of  Novi  and  others  in  Italy  chiefly  for  the  purpose  of  pay 
ments. 

THE  origin  of  the  fairs,1  or  periodical  markets,  which  for  cen 
turies  constituted  a  chief  feature  of  the  commerce  of  Europe  and 
Asia,  is  of  remote  antiquity.2  In  the  13th,  14th  and  15th  cen 
turies,  the  greater  part  of  the  commerce  of  Europe  was  accom 
plished  at  fairs.  Thousands  of  these  markets,  shorn  of  their 
importance  and  magnitude,  are  yet  held  on  those  continents  ;3 

•Fairs  are  thus  defined  by  Savary : —  "A  concourse  of  merchants,  of 
manufacturers,  of  artisans,  of  workmen,  and  of  many  others  of  every  con 
dition,  and  of  every  profession,  inhabitants  and  strangers,  who  meet  every 
year  at  a  special  place,  and  at  a  special  time ;  some  to  bring  thither,  sell 
and  deliver  their  goods,  manufactures,  works,  merchandise,  and  provisions  ; 
others  to  make  their  purchases,  and  some  solely  through  curiosity,  and  for 
the  sake  of  the  amusements  generally  enjoyed  at  these  sorts  of  assemblies." 
— Dictionnaire  du  Commerce,  "Foire." 

2  The  fairs  of  Lyons  have,  according  to  some  French  writers,  an  antiquity 
as  high  as  the  period  of  Roman  domination  in  Gaul. — Duchesne,  Antiqiiite 
des  Villes.     A  summary  of  their  history  may  be  found  in  Encyclo.  Metho- 
dique  Commerce,  vol.  ii.,  page  140. 

3  Not  less  than  500  are  yet  enumerated  as  existing  in  France,  and  up 
wards  of  70  in  Belgium.     It  may  be  said  they  subsist  with  diminished  im 
portance  throughout  Europe ;  they  have  dwindled  most  in  Great  Britain. 
In  many  parts  of  Asia  and  Africa  they  remain  in  full  vigor.     It  is  in  the 
memory  of  many  yet  living,  that  fairs  were  held  in  this  country,  especially 

(275) 


276  THE    FAIRS    OF    RUSSIA. 

those  best  maintain  their  importance,  whose  locality  is  in  Asia, 
or  on  the  confines  of  Europe,  and  among  a  people  whose  civiliza 
tion,  industry,  and  facilities  for  trade,  correspond  with  the  state 
of  Europe  in  the  Middle  Ages.  The  chief  part  of  the  commerce 
between  Russia  and  China  is  now  carried  on  at  the  Fair  of 
Kiachta,  in  Mongolia,  on  the  frontiers  of  China.  The  Russians 
carry  to  this  fair  furs,  skins,  Russia  leather,  woollen  cloths,  Ger 
man  and  Russian  heavy  linens,  cattle,  and  the  precious  metals, 
which  they  exchange  for  tea,  silk  raw  and  manufactured,  porce 
lain,  sugar,  rhubarb,  nankins,  musk,  &c.  The  Fair  of  Nijni 
Novgorod,  in  Russia,  is  still  the  mart  of  a  great  trade ;  its 
transactions  have  been  estimated  by  some  writers  as  high  as 
§100,000,000  in  the  six  or  eight  weeks  during  which  they  last. 
The  actual  sales,  at  the  Fair  of  1849,  exceeded  $45,000,000. 
The  Fair  of  Sinigaglia,  in  Italy,  retains  also  a  large  trade ;  the 
value  of  its  exchanges,  as  late  as  1884,  being  estimated  at 
§16,000,000.  It  is  very  apparent  that  the  concentration  of 

merchandise  and  merchants  which  such  an  immense  business  im- 

* 

plies  must  afford  extraordinary  facilities  for  trade,  the  making 
of  payments,  and  indeed  all  kinds  of  mutual  adjustment. 

In  many  parts  of  Russia,  Poland  and  Germany,  where  the 
facilities  of  commerce  are  not  even  now  equal  to  those  of  France 
and  Italy  two  or  three  hundred  years  ago,  some  of  the  fairs  are 
continued.  To  those  mentioned  above  may  be  added  that  of 
Kief  on  the  Dneiper,  in  Russia.  Besides  its  fairs  for  merchan 
dise,  it  has  an  annual  assembly  for  payments,  which  lasts  from 
the  10th  to  the  80th  of  January.  In  that  of  1804,  there  were 
present  941  proprietors,  149  merchants,  and  144  clerks.  The 
payments  of  that  year,  estimated  by  a  duty  of  a  half  per  cent. 

in  connection  with  horse-racing ;  but  they  never  took  deep  root  here.  Their 
existence  is  considered  as  an  index  of  the  state  of  civilization  ;'  and  it  is 
observable  that,  in  those  countries  where  they  most  nourish  at  the  present 
day,  the  state'of  industry,  trade,  and  the  progress  in  civilization  is  about 
that  which  existed  in  Europe  during  the  Middle  Ages.  But  that  they  still 
nourish  in  some  parts  of  France  is  evident  from  the  fact  that,  in  1833,  about 
80,000  persons  attended  the  Fair  of  Beaucaire,  and  that  business  was  done, 
on  that  occasion,  to  the  amount  of  $30,000,000.  They  prevail,  to  some 
extent,  in  Mexico. 


THE    PAIRS    OF    LYONS.  277 

levied  upon  them,  amounted  to  22,659,000  roubles,  equal  to 
about  $16,994,250.  This  sum  must,  of  course,  have  been  set 
tled  in  twenty  days. 

Merchants  found  that  a  very  great  proportion  of  their  pay 
ments  could  be  most  conveniently  made  at  certain  fairs ;  and 
that  where  it  was  most  convenient  for  all  to  pay,  it  became  most 
desirable  for  all  to  receive.  Bills  of  exchange  were  generally 
made  payable  at  the  various  fairs  :  these  were  held  at  intervals 
of  from  three  to  twelve  months,  and  the  bills  were  made  payable 
at  the  fairs  whither  the  parties  generally  resorted.  A  very  great 
concentration  of  payments  consequently  took  place.  In  many 
instances,  the  payments  effected  at  the  fairs  vastly  exceeded  in 
amount  the  actual  sales  of  commodities,  and  became  the  object 
of  special  attention  and  legislation. 

The  modes  of  effecting  payments,  in  the  days  when  fairs 
were  in  the  height  of  their  importance,  were  various  and  multi 
form  in  different  countries,  and  even  in  the  same  country.  If 
no  special  modes  of  payment  or  adjustment  were  resorted  to  for 
the  purpose  of  saving  time  and  expense,  the  vicinity  of  parties 
brought  thus  into  contact  enabled  them  to  give  to  their  goods, 
and  to  money,  a  circulation  of  tenfold  rapidity. 

We  refer  to  the  methods  and  processes  of  the  PAYMENTS  at 
Lyons  as  a  specimen  and  illustration  of  the  mode  of  adjustment 
pursued  in  these  commercial  assemblages  of  the  Middle  Ages. 

The  fairs  at  Lyons  were  among  the  most  important,  in  their 
day,  of  any  in  Europe.  There  were  held  in  that  city  four  in 
each  year :  Kings,  or  Epiphany,  began  in  January ;  Easter  in 
April ;  August  in  that  month ;  and  All  Saints  in  November  ; 
Four  "PAYMENTS"  were  also  held,  one  for  each  fair.  The 
Epiphany  Payments  were  held  in  all  March ;  those  of  Easter,  all 
June ;  those  of  August,  all  September ;  and  those  of  All  Saints, 
all  November.  Engagements  to  a  vast  amount,  arising  out  of 
other  transactions  than  those  which  occurred  at  the  fairs,  were 
made  payable,  at  these  Payments,  by  bills  of  exchange,  book 
accounts,  and  otherwise.  Those  who  resorted  thither  either  for 
the  business  of  merchandise,  or  for  the  payments  of  commerce 
carried  on  elsewhere,  opened  an  account  in  their  books  with  each 


278  THE    PAYMENTS    OF    LYONS. 

Payment  by  name.  This  exhibited  what  sums  the  accountant 
had  promised  to  pay,  and  what  sums  others  had  agreed  to  pay 
him  at  each  Payment,  and  the  names  of  the  persons,  debtors 
and  creditors.  The  balance  of  this  account  showed  at  once  how 
much  each  merchant  had  to  pay  more  than  he  was  to  receive,  or 
to  receive  more  than  he  was  to  pay,  at  each  Payment.  Bills 
drawn  payable  at  future  Payments  were  expressed  thus :  "Pay 
to  A.  B.  at  next  Easter  Payments," kc. ;  or,  if  Easter  Fair  had 
begun,  and  it  was  intended  the  money  should  be  payable  at  the 
Payments  of  the  same  fair,  it  was  expressed :  "at  the  current 
faster  Payments."  Much  of  the  business  done  at  the  fairs  was 
upon  a  credit  of  three  or  six  months,  and  made  payable  at  the 
proper  Payments.  A  very  large  proportion  of  the  sales  were  for 
cash ;  that  is,  payable  at  the  Payments  immediately  ensuing  the 
fair.  The  parties  who  had  made  up  their  accounts  for  the  fair 
previous  to  their  coming,  continued  their  entries  in  the  same 
account  of  their  debts  and  credits,  as  they  multiplied  by  the 
transactions  of  the  fair,  until  it  closed.  Those  parties  who  could 
not  attend  in  person,  or  who  preferred  it,  were  allowed  to  send 
their  accounts,  duly  authenticated,  to  be  presented  by  an  agent 
duly  authorized. 

At  this  assemblage  of  all  the  principal  merchants  of  Lyons, 
and  of  those  from  other  parts  of  France,  and  from  foreign  coun 
tries,  every  PAYMENT  was  opened  with  ceremony.  The  Provost 
Marchand  came  to  the  exchange  with  his  Register,  and  six 
Syndics  —  two  French,  two  Italians,  and  two  Swiss  or  Germans 
—  and  then,  after  a  short  discourse  to  the  assistants,  recom 
mending  probity  in  trade,  and  observance  of  the  laws,  customs 
and  usages  of  the  place,  the  laws,  customs  and  usages  were  read, 
and  the  clerk  drew  up  a  process  verbal  of  the  opening  of  the 
Payment.1 

1  "  It  is  admirable  to  see  the  manner  in  which  the  bankers  and  merchants 
of  Lyons  make  their  acceptances  and  payments  among  themselves  of  the 
bills  of  exchange  which  they  draw,  and  which  are  remitted  to  them  from 
every  part  of  Europe,  payable  at  the  Payments;  for  there  will  be  paid 
sometimes,  in  two  or  three  hours,  a  million  of  livres,  without  disbursing  a 
penny  in  money :  that  is  indeed  surprising  to  those  who  do  not  know  how 
it  is  effected.  It  may  not  be  out  of  place  to  explain  it  here.  / 


METHODS    OF    PAYMENT.  279 

The  first  five  days  were  devoted  chiefly  to  the  presentation 
and  acceptance  of  such  bills  as  were  not  previously  accepted : 
on  the  third  day,  however,  a  special  meeting  was  held,  at  which 

"  The  opening  of  every  Payment  is  made  on  the  first  day  of  the  month, 
excepting  holy  days,  for  each  one  of  the  four  annual  Payments.  During 
two  hours  each  day  set  apart  for  that  purpose,  is  held  an  assembly  of  the 
principal  merchants  of  the  place,  both  French  and  foreign,  in  the  presence 
of  the  Provost  of  merchants,  or,  in  his  absence,  before  the  oldest  magistrate 
present,  in  which  assembly  commences  the  acceptance  of  bills  of  exchange 
payable  at  the  current  payment.  This  continues  till  the  sixth  day  of  the 
month  inclusive,  after  which  the  holders  of  bills  may  protest  them  for  non- 
acceptance  during  the  rest  of  the  month. 

"  Formerly  acceptances  were  made  verbally,  and  not  by  writing  ;  but 
the  bankers  and  merchants  of  Lyons  carried  a  little  book  called  a  BILAX, 
in  which  to  make  acceptances.  They  entered  in  it  all  the  bills  of  exchange 
drawn  upon  them,  and  which  were  presented  by  those  who  were  the 
holders.  An  acceptance  was  signified  by  the  mark  of  a  cross  on  the  mar 
gin  of  the  book  in  which  they  had  registered  the  bill,  which  denoted  that 
the  bill  was  accepted  ;  but  if  they  wished  to  deliberate  whether  they  would 
accept  the  bill  or  not,  they  put  a  letter  V  on  the  margin,  which  signified 
(vu,  seen)  that  it  had  been  presented  ;  and  when  they  refused  to  accept, 
they  put  S.  P.,  which  signified  (sous  protest)  that  it  was  under  protest ; 
that  is  to  say,  that  he  who  was  the  bearer  ought  to  protest  it  within  three 
days  after  the  current  Payment,  that  is,  on  or  before  the  third  of  the  fol 
lowing  month.  f 

"  But  now  acceptances  are  made  in  writing,  in  pursuance  of  the  third 
article  of  the  law  of  June,  1667,  for  reasons  which  will  be  mentioned  in 
their  place. 

"  On  the  third  day  of  the  month  of  Payment,  they  fixed  the  rate  of  ex 
change  between  Lyons  and  all  foreign  places.  This  was  done  at  a  meeting 
of  merchants,  foreign  and  domestic,  in  presence  of  the  Provost  of  merchants. 

"On  the  sixth  day,  the  business  of  payment  commenced,  and  continued 
until  the  last  day  of  the  month  inclusively,  after  which  no  entries  in  their 
bilans,  or  book  of  payments,  could  be  made ;  and  if  any  were  made,  they 
were  held  to  be  void  according  to  law. 

"  The  Payments  of  each  day  were  commenced  by  the  merchants  and 
bearers  of  bilan  in  the  hall  of  the  exchange,  at  ten  o'clock  in  the  morning, 
and  terminated  at  half-past  eleven,  after  which  hour  no  further  payment 
was  allowed. 

"  The  mode  of  proceeding  was  as  follows :  —  The  bankers  and  merchants 
carried  to  the  exchange  their  bilan  of  debit  and  credit ;  that  is  to  say,  a 
book  in  which  they  had  written  on  one  side  what  was  due  to  them,  and 
upon  the  other  what  they  owed.  They  addressed  themselves  to  those  to 


280  BILANS,     OR    BOOK    OF    BALANCES. 

the  rate  of  exchange  between  Lyons  and  all  other  places  in 
France  or  abroad  was  settled  and  fixed  for  the  current  Pay 
ments,  by  a  plurality  of  voices.  After  the  fifth  day  no  more 
bills  could  be  accepted;  and  before  the  meeting  of  the  sixth  day, 
all  the  accounts  for  the  Payment  must  be  definitely  "written  out 
and  closed.  These  accounts  were  termed  "  BILANS,"  being  not 
mere  loose  leaves,  but  sheets  carefully  fastened  or  bound  up 
together.  A  balance  once  made  up  and  submitted  could  not  be 
altered ;  and  its  proprietor  was,  by  the  regulations  of  the  Pay 
ments,  held  responsible  for  the  correctness  of  his  entries.  Such 
was  the  character  of  those  admitted  to  these  Payments,  that  a 
balance  stated  in  this  way,  says  an  excellent  writer  on  com 
merce,  who  visited  Lyons  while  these  fairs  were  yet  in  full  vigor, 
"  carried,  during  my  residence  in  that  city,  as  much  credit 
among  the  merchants  of  the  place  as  if  the  same  had  been  done 
with  witnesses  by  a  public  notary."  Those  whose  business  did 
not  admit  their  being  the  bearers  of  BILANS,  were  permitted  to 
send  in  their  debts  and  credits  by  any  broker  or  banker  who 
would  become  responsible,  by  adding  them  to  his  own. 

All  the  preliminaries  being  accomplished,  on  the  morning  of 
the  sixth  day  the  bearers  of  these  little  books,  or  prepared  state- 

\vhom  they  were  in  debt,  and  gave  them  for  debtors  one  or  more  of  those 
who  owed  them  a  like  sum :  this  debtor,  or  debtors,  being  accepted  in  their 
place,  the  substitution  was  entered  in  their  books,  and  the  debt  was  regarded 
as  paid.  All  parties  did  the  same,  and  so  the  payments  proceeded.  At 
the  end  of  the  month,  those  who  owed  more  than  was  due  to  them  paid  tho 
amount  in  ready  money  to  the  holders  of  bills  who  had  more  coming  to 
them  than  they  owed. 

"  The  bills  of  exchange  payable  at  the  payment,  and  not  paid  before  the 
last  day  of  the  month  inclusively,  were  to  be  protested  within  the  three  first 
days  of  the  following  month. 

"  If  a  banker  or  merchant  accustomed  to  carry  a  book  at  the  place  of 
payment  meets  with  no  one  willing  to  accept  him  as  a  debtor,  during  the 
time  of  payment,  he  is  reputed  to  have  failed.  There  is  no  place  in  the 
world  where  merchants  are  more  ready  to  give  credit  than  at  Lyons  ;  so, 
also,  there  is  no  place  where  payments  are  more  punctually  made  ;  for,  if 
the  time  of  payment  is  permitted  to  pass  one  day,  the  credit  of  the  party  is 
lost,  and  he  is  accounted  as  bankrupt."  —  Purfait  Negotiant,  par  J. 
Savary,  4to,  1777 ;  tome  i.,  chap,  xii.,  p.  257. 


VIBE  MEN    DE    PARTIE.  281 

ments  assembled  at  the  exchange  as  the  clock  struck  ten,  and 
afterwards  upon  each  day  not  a  holy  day  at  the  same  hour,  to  be 
adjourned  at  precisely  half  after  eleven.  In  this  assembly  every 
one  present  met  his  debtors  and  his  creditors,  or  those  who  ap 
peared  for  them.  The  mode  of  adjustment  adopted  was  for  each 
one,  by  inspection  of  his  book,  to  ascertain  in  what  way  he  could 
best  apply  his  credits  in  discharge  of  his  debts :  the  usual  man 
ner  of  proceeding  was  by  debtors  procuring  the  assumption  of  their 
debts  by  those  who  were  indebted  to  them.  A.  owes  B.  a  thou 
sand,  and  B.  owes  C.  fifteen  hundred.  B.  asks  A.  to  assume  a 
thousand  of  his  debt  to  C. :  the  latter  accepts  the  assumption, 
and  a  thousand  is  thus  paid.  By  comparing  books,  it  is  per 
ceived  that  D.  owes  a  large  sum  to  E.,  the  latter  a  like  sum  to 
F.,  the  latter  a  like  sum  to  G.,  the  latter  a  like  sum  to  H. ;  and 
all  being  met,  it  is  agreed  that  these  sums  shall  be  acquitted  by 
a  payment  from  D.  directly  to  H.1  In  all  cases  these  under- 

1  The  act  of  writing  off  debts,  or  making  these  assumptions,  was  called, 
technically,  a  "  viremen  de  partie,"  a  term  in  much  use,  and  of  pregnant 
meaning,  in  European  commerce  a  few  centuries  ago. 

"According  to  article  fourth  of  the  law  of  1667,  the  business  of  transfer 
ring,  paying  or  setting-off  debts  was  to  commence  on  the  sixth  day  of  every 
payment;  but  according  to  usage,  no  written  entries  were  made  in  their 
books  until  the  sixteenth. 

"  The  viremens  de  parties  are  transfers,  or  set-offs,  which  the  bankers  and 
merchants  make  among  themselves,  by  means  of  which  they  pay  in  a  mo 
ment  considerable  sums  with  little  or  no  money. 

"  To  accomplish  easily  these  payments,  or  set-offs,  the  bankers  or  mer 
chants  who  frequent  the  exchange  make  a  "  bilan,"  or  statement,  for  every 
payment  in  which  they  enter  to  their  debit  the  sums  which  they  owe,  and 
the  names  of  those  to  whom  they  are  in  debt ;  and  to  their  credit  the 
sums  which  are  due  to  them,  and  the  names  of  those  who  owe  them.  When 
they  commence  paying,  they  look  upon  the  debtors  of  the  person  who  owes 
them  as  their  own  debtors,  and  the  creditors  of  the  person  to  whom  they 
are  in  debt  as  their  own  creditors." 

The  author  here  furnishes  the  model  of  a  transfer,  or  set-off,  which  makes 
the  matter  no  plainer  than  to  say  that  some  two,  three  or  more  persons 
find,  by  inspection  of  their  books,  that  they  are  debtors  and  creditors  of 
each  other  in  such  way  that  they  can,  by  a  transfer,  or  by  assumption,  of 
one  of  the  parties,  pay  off  or  extinguish  two,  three  or  more  debts.  It  is 
plain  enough  that  when  A.  owes  B.  a  sum  of  money,  and  B.  owes  C.  the 


282  PROCESS     OF    ADJUSTMENT. 

takings  are  forthwith  entered  upon  the  book  in  the  hands  of 
each,  so  that  the  books  continue  to  exhibit  the  exact  progress  of 
the  adjustment,  and  the  state  of  indebtedness  up  to  the  close  of 
the  payments.  It  is  impossible,  by  any  description,  to  trace  the 
processes  by  which  parties  thus  situated  could  finally  reduce 
their  indebtedness  to  the  mere  balances  which  each  one  had  to 
receive  or  pay  more  than  he  owed,  and  till  it  was  seen  that  the 
balances  to  be  paid  were,  in  the  aggregate,  the  same  that  were 
to  be  received,  being  in  fact  the  same  thing.  It  is  obvious  that, 
so  long  as  any  one  who  owed  anything  had  any  amount  coming 
to  him,  he  could  apply  it  to  his  debt ;  and  the  adjustment  would 
only  cease  when  the  debtors  present  had  no  further  credits  which 
they  could  apply  to  the  further  reduction  of  their  indebtedness. 
They  could  do  nothing  more  than  pay  the  balances  of  their 
several  accounts  to  whomsoever  they  might  have  become  indebted 
in  the  many  assumptions  which  had  occurred.  In  each  case  this 
balance  would  be  precisely  what  the  statement  exhibited  at  the 
beginning;,  that  is,  the  result  would  show  that  each  person  would 
have  to  pay  in,  at  last,  the  precise  sum  which  his  statement 
showed,  at  first,  he  was  in  debt  more  than  was  coming  to  him ; 
and  of  course  each  one  having  a  favorable  balance  would  receive, 
after  his  debts  were  all  paid,  the  sum  which,  at  the  first,  he 
knew  was  coming  to  him  more  than  he  owed.  The  changes  of 
indebtedness  which  would  take  place  in  the  progress  of  such  an 
adjustment  might  be  many,  but  .the  result  would  be  according  to 

same  sum,  and  so  on  through  the  alphabet,  one  payment  by  A.  to  C.  is 
enough  to  discharge  the  whole,  if  all  are  present,  consent,  and  make  the 
proper  entries.  So,  however  complicated  the  indebtedness,  the  parties 
could  proceed  by  dividing  sums,  until  all  was  paid,  except  the  balances. 

"According  to  article  eight  of  the  law  of  1667,  it  was  necessary  that 
every  transfer,  or  set-off,  should  be  made  in  the  presence  of  all  concerned 
in  it.  Every  such  transaction,  after  twenty-four  hours,  becomes  irrevoca 
ble  and  binding  as  any  act  whatever ;  and  if  any  party  concerned  in  a 
transfer  is  not  present  at  the  exchange  at  the  time  of  the  writing,  they  take 
care  to  send  him  a  memorandum  of  the  transaction,  and  if  he  keeps  silent 
twenty-four  hours,  it  is  regarded  as  binding,  and  the  debt  as  paid/7 — 
Banque  Rendue  Facile  aux  Principales  Nations  de  V Europe,  par  11.  P. 
Girardeau,  Negotiant  a  Lyon  ;  1703,  4to,  page  129,  also  302. 


ACCOUNT    OF    THE    PAYMENTS.  283 

the  original  statement.  It  is  clear  that,  by  perseverance  and 
comparison  of  books,  they  could  not  fail  of  a  complete  discharge 
of  all  the  mutual  indebtedness,  and  payment  of  the  balances 
would  close  the  whole. 

The  following  account  of  these  Payments  is  from  a  reliable 
English  writer,  who  was  himself  a  witness  of  the  process  :  — 

"  The  .sixth  day,  all  the  merchants  residing  upon  the  place 
appear  in  a  certain  public  room,  near  the  Bourse,  with  their 
books  or  bilans,  containing  both  their  debits  and  credits  of  both 
open  debts  and  bills  of  exchange  ;  and  these  address  themselves 
to  one  another,  and  to  whom  they  are  indebted,  intimating  unto 
them  their  readiness  to  transfer  parcels,  or,  as  they  term  it,  virer 
partie,  to  give  for  debtor  one  or  more  who  doth  owe  and  stands 
indebted  to  them  the  like  sum  or  parcel,  the  which  being  accepted 
by  the  creditors,  the  sum  is  respectively  registered  and  noted  in 
the  Mian  aforesaid ;  and  after  that  time  that  parcel  is  under 
stood  to  be  transferred,  and  remaineth  entirely  upon  the  risgoe, 
peril  and  fortune  of  the  party  that  did  accept  the  same.  And 
in  this  manner  here  I  have  observed  a  million  of  crowns  hath 
in  a  morning  been  paid  and  satisfied,  without  the  disbursement 
of  a  denier  in  money ;  and,  therefore,  to  this  purpose  all  mer 
chants  resident  here,  or  their  servants  for  them,  are  compelled 
in  this  manner  to  appear  with  their  bilans,  thus  to  satisfy 
accounts  with  their  creditors,  and  make  good  their  payments, 
or,  in  default  of  their  appearance,  are,  by  the  custom  of  the 
place,  declared  as  bankrupts.  And  this,  in  brief,  is  the  remark 
able  custom  of  Lyons,  in  matters  of  exchanges,  upon  every  Pay 
ment."  * 

The  parties  who,  at  the  opening  of  the  Payments,  knew  they 
would  have  balances  to  pay  or  receive,  could  not  anticipate  to 
whom  they  would,  by  the  result  of  all  the  operations,  make  pay 
ments,  or  from  whom  they  would  receive  them.  These  balances 
to  pay  or  receive  being  of  equal  amount,  corresponding,  of 
course,  in  the  aggregate  to  each  other,  might  have  been  paid  in 
at  the  office  of  the  exchange,  and  have  been  taken  by  those  enti- 

1  "  Map  of  Commerce,"  by  Lewis  Roberts,  edition  of  1700,  Chap.  SOS. 


284  RATIONALE    OP    ADJUSTMENT. 

tied  to  them,  and  then  the  result  of  the  adjustment  would  have 
been  merely  a  setting-off  of  mutual  debts,  without  a  remainder. 
At  Lyons  it  required  the  continuation  of  this  process  for  several 
weeks  to  close  up  the  large  transactions  of  that  city,  and  the 
merchants  who  congregated  there.  No  doubt  there  was  much 
room  for  the  exercise  of  commercial  and  arithmetical  skill ;  and 
as  one  object  was  in  the  view  of  all,  the  whole  operation  was 
greatly  expedited  by  the  efforts  of  expert,  prompt  and  expe 
rienced  merchants,  who  would  be  present. 

To  understand  more  fully  the  rationale  of  this  mode  of  adjust 
ment,  let  us  examine  in  what  other  modes  the  end  could  have 
been  attained.  If  we  suppose  this  assemblage  to  be  seated  round 
a  vast  table,  any  one  having  a  sum  of  10,000  livres  in  coins 
could  have  paid  it  to  any  other  to  whom  he  owed  that  sum,  or 
more ;  the  receiver  could,  in  like  manner,  have  passed  it  round 
to  any  one  to  whom  he  was  indebted,  and  so  on,  each  one  making 
the  proper  entry  on  his  book.  This  money  might  thus  circulate, 
until  it  fell  into  the  hands  of  some  one  who  had  paid  all  his 
debts.  A  further  sum  might  then  be  started  from  another  quar 
ter,  and  be  circulated  with  like  result.  It  is  obvious  that  this 
circulation  would  not  cease  until  the  payments  were  nearly  com 
pleted  ;  and  a  comparatively  small  sum  would,  by  such  circulation, 
effect  the  whole  adjustment :  a  sum  sufficient  to  pay  the  final 
balances  would  be  ample  to  pay  fifty,  or  a  hundred  times  the 
amount,  as  rapidly  as  it  could  be  passed  round  the  table. 

Another  mode  would  have  been  to  make  a  common  fund  of 
the  whole  of  the  claims,  each  person  being  entitled  to  an  amount 
of  that  fund  corresponding  to  the  whole  amount  of  the  credits 
on  his  book,  or  "  bilan."  The  payments  might  then  have  pro 
ceeded  by  each  one  drawing  checks  for  the  precise  amount  of 
his  several  debts,  and  delivering  them  to  his  creditors.  This 
would  have  discharged  the  whole  mass  of  indebtedness,  except 
the  balances,  in  a  morning.  Or,  what  would  have  been  shorter 
still,  each  one  could  have  delivered  simultaneously  a  release  of 
all  claims,  except  the  balances,  which  their  books  showed  to  be 
payable  and  receivable  by  some  who  had  to  pay  more  than  they 
had  to  receive,  or  to  receive  more  than  they  had  to  pay. 


VARIOUS    MODES.  285 

Or,  another  way.  If  a  clerk  had  been  appointed  by  consent 
of  all,  and  a  copy  of  each  "  Ulan'  furnished  to  him,  he  having 
read  them  aloud  before  the  whole  assemblage,  and  no  objection 
being  made,  could  have  declared  the  balance  as  stated,  and 
have  received  the  amount  on  the  spot  from  those  who  had 
balances  to  pay ;  and  thus  proceeding  with  the  whole,  each 
man's  debts  and  credits  would  have  been  settled  as  soon  as  read. 
Each  one,  by  inspection  of  his  own  statement,  could  have  deter 
mined  whether  the  one  read  was  correct,  so  far  as  it  affected 
him.  When  the  accounts  had  been  read  over,  and  the  balances 
paid  in,  the  whole  business  would  have  been  adjusted,  and  the 
clerk  would  have  in  his  hands  precisely  the  sum  necessary  to 
pay  those  who  were  entitled  to  receive  more  than  they  had  ^o 
pay.  This  would  have  been  a  safe  and  rapid  way  of  completing 
this  liquidation.  The  same  thing  might  have  been  done  in  a 
more  formal  manner,  by  taking  the  copies  of  the  "  bilans"  as 
delivered  in  to  the  clerk,  and  making  up  from  them  a  formal 
account  with  each  individual,  as  might  be  done  by  comparison 
of  all  the  statements,  by  which  it-  would  be  seen  if  the  claims 
made  by  each  were  admitted  in  all  cases  by  those  against  whom 
they  were  entered.  This  formal  account  with  each  being  bal 
anced,  would  furnish  the  same  result. 

The  amount  of  indebtedness  thus  discharged  yearly  at  the 
"  Payments  of  Lyons,"  independent  of  the  balances  paid  in 
money,  were  estimated  at  from  fifty  to  a  hundred  millions  of 
crowns.  The  whole  amount  of  coins  required  to  pay  the  balances 
could  not  possibly  exceed  a  quarter  of  a  million.1 

There  were  many  fairs  which,  from  their  central  or  conve 
nient  situation,  wore  made  principal  points  for  this  mode  of  ad 
justing  accounts.  Lyons  was  one  of  these.  At  some,  as  Novi,2 

1  As  late  as  1841,  business  was  transacted,  at  the  Fair  of  Leipsic,  to  the 
amount  of  £4,905,000,  and  this  without  including  the  vast  business  done  in 
the  sale  of  books.  —  Facts  and  Figures,  page  57. 

2  "  Novi  is  in  the  Genoese  territory,  upon  the  confines  of  Lombardy.     It 
is  there  the  Fairs  of  Genoa  are  generally  held,  called,  however,  now  the 
Fairs  of  Novi.     They  were  formerly  held  at  Bizanzone.     At  these  fairs  the 
chief  bankers  and  merchants  of  Italy,  Lyons,  &c.,  meet  for  the  purpose  of 


286  UTILITY    OF    THE    FAIRS. 

Placentia,  and  Bolzano,  in  Italy,  scarce  any  other  business  was 
done.  Of  the  former,  Postlethwaite  gives  this  account  in  his 
"Dictionary  of  Commerce:"  —  "Though  there  resorts  here 
no  small  concourse  of  tradesmen,  with  all  sorts  of  commodities, 
yet  'tis  not  that  which  renders  them  so  considerable,  as  that  the 
most  eminent  bankers  and  merchants  from  Lyons,  Italy,  and 
from  some  other  more  remote  parts,  meet  here  to  settle  their 
affairs,  and  balance  accounts,  chiefly  in  matters  of  bank  and  ex 
change."  .  .  .  "  This  fair  being  principally  for  regulating 
payments  four  times  a  year,  it  might  properly  be  called  the 
transfer  fair ;  for,  of  the  many  millions  there  negotiated  in  a 
year,  there's  not  above  100,000  crowns  paid  in  specie."  —  Arti 
cle  "Fairs." 

At  the  present  time  we  have  no  data  from  which  to  estimate, 
or  even  approximate  the  amount  of  the  payments  made  at  the 
fairs  of  Europe,  in  the  period  of  their  greatest  success.  We 
know  that  when  trade  had  increased,  in  certain  channels,  to  such 
an  extent  that  the  fairs  no  longer  sufficed  as  places  of  depot  or 
sale,  payments  continued  for  a  long  time  to  be  chiefly  made  in 
them.  Those  who  are  curieus  on  this  subject  may,  in  the  travels, 
memoirs  and  histories  of  the  time,  find  abundant  evidence  of  the 
immense  agency  of  these  institutions  in  the  promotion  of  foreign 
and  domestic  trade.  They  will  find,  also,  that  the  payments 
made  in  the  precious  metals  bore  a  very  small  proportion  to 
those  made  in  the  manner  we  have  indicated. 

The  usefulness  of  the  fairs  arose  from  the  concentration  of 
merchandise  and  merchants,  and  the  consequent  efficiency  given, 
in  the  first  instance,  to  the  circulation  of  money.  This  concen 
tration  led  to  the  discovery  of  the  system  of  payments  afterwards 
adopted.  This  system,  doubtless,  had  its  agency  in  leading 

making  payments  and  adjusting  accounts,  especially  those  which  concern 
banking.  Very  little  other  business  is  done.  There  are  four  of  these  fairs 
held  each  year ;  each  lasting  eight  days,  though  sometimes  the  business  of 
the  bankers  and  merchants  prolongs  that  period."  —  Traite  Generate  du 
Commerce,  par  Samuel  Ricard;  5th  edition  par  N.  Siruyck ;  Amsterdam, 
1732,  page  337,  4to :  and  see,  at  page  595,  full  instructions  for  keeping 
books  in  reference  to  the  mode  of  settlement  at  these  fairs. 


CONCLUSIONS.  287 

bankers  and  merchants  to  the  adoption  of  a  more  effective  bank 
ing  system.  It  taught  men  not  only  the  mutuality  of  commerce, 
which  enabled  them  to  set-oft*  mutual  debts,  but  also  the  use  of 
circulating  credits  as  a  medium  of  exchange,  or  a  means  of  pay 
ment.  It  set  men  free  from  the  idea  that  payments  must  neces 
sarily  be  made  in  money,  and  convinced  them  that,  however 
important  the  precious  metals  were  in  occasional  emergencies, 
and  however  necessary  for  payment  of  balances,  and  for  the 
business  of  retail  trade,  they  were  not  only  not  necessary,  but  a 
positive  impediment  in  the  large  operations  of  trade.  It  taught 
them  that  mutual  confidence,  and  undeviating  punctuality,  were 
the  true  foundations  of  that  system  of  exchanging  the  products 
of  industry  with  each  other,  which  men  call  trade. 


CHAPTER    XIII. 

THE    BANK    OF    VENICE. 

Bank  of  Venice —  Originated  in  1171,  in  a  loan  to  the  Republic —  Office  of 
transfer  —  Interest  promptly  paid, —  Transferred  in  any  amount  in  pay 
ment  of  commodities  and  of  debts — All  sums  deposited  with  the  Bank 
taken  by  the  Republic  —  In  1423,  bills  of  exchange  and  payments  in  gross 
ordered  to  be  made  only  in  bank  —  Premium  on  bank  funds —  Circulation 
—  Banco  del  Giro  —  Evils  of  coinage,  and  severity  of  laws  respecting  it  — 
Department  for  deposit  of  money  repayable  on  demand  —  Deposit  transfer 
able  —  Its  success,  without  injury  to  the  old  business  —  On  two  occasions 
these  deposits  taken  by  the  Government,  but  repaid  —  Amount  of  capital  of 
the  Bank —  London  Encyclopedia  cited  and  corrected —  Causes  of  agio — 
Precautions  against  fraud  —  Great  concentration  of  payments  at  Venice. 

IN  the  year  1171,  a  Venetian  fleet  of  a  hundred  galleys  was 
sent  to  avenge  an  outrage  perpetrated  by  the  Grecian  Emperor, 
Manuel,  upon  Venetian  merchants  in  his  empire.  This  fleet 
humbled  his  pride,  and  compelled  him  to  give  satisfaction.  The 
contest  is  memorable  for  having  given  origin  to  the  Bank  of 
Venice.  "  For  the  republic  being  oppressed  by  the  charges  of 
the  war  against  the  Emperor  of  the  East,  and  at  the  same  time 
involved  in  hostilities  with  the  Emperor  of  the  West,  the  Duke 
Vitale  Michel  II.,  after  having  exhausted  every  other  financial 
resource,  was  obliged  to  have  recourse  to  a  forced  loan  from  the 
most  opulent  citizens,  each  being  required  to  contribute  accord 
ing  to  his  ability.  On  this  occasion,  and  by  the  determination 
of  the  Great  Council,  the  office  of  chamber  of  loans  (LA  CAMERA 
DEGL'  IMPRESTITI)  was  established:  the  contributors  to  the  loans 
were  made  creditors  of  that  office,  from  which  they  were  to  receive 
an  annual  interest  of  four  per  cent."1  The  Bank  of  Venice 

1  M'Pherson's  Annals  of  Commerce,  vol.  i.,  p.  341.  Sanuto;  Vite  di 
Duche  di  Venezia,  App.  Muratore  Script  v.,  xxii.  col.,  p.  502.  This  is 

(288) 


THE    BANK    OF    VENICE.  289 

gradually  assumed  the  form  under  which  it  was,  for  many  ages, 
the  admiration  of  Europe,  the  chief  instrument  of  Venetian 
finance,  and  the  chief  facility  of  a  commerce,  not  surpassed  by 
that  of  any  European  nation.  Its  progress  and  form  were,  how 
ever,  clearly  that  which  naturally  grew  out  of  the  position  of  the 
first  contributors  to  the  loan.  Its  origin  was  not  the  first  occa 
sion  in  Venice,  or  elsewhere,  where  the  State  became  a  borrower 
from  its  subjects ;  it  may  have  been  the  first  in  which  the 
loan  was  taken  by  a  regular  subscription,  and  the  subscribers 
became  a  specially  constituted  board  for  their  own  protection,  and 
the  management  of  the  loan.1  The  book  in  which  these  loans 
were  inscribed  was  authenticated  by  the  government,  and  made 
evidence  of  the  whole  amount  of  the  debt,  with  the  proportion 
belonging  to  each  subscriber.  It  was  an  easy  step  to  commence 
the  transfer  of  these  loans  in  part,  or  in  whole.  The  interest 
was  punctually  paid  by  the  government  into  the  office,  and  dis 
tributed  thence  to  those  who  were  entitled  to  it.  Facility 
of  transfer,  coupled  with  the  security  of  the  State,  and  regular 
payment  of  the  interest,  seems  to  have  led  to  a.  very  rapid  cir 
culation  of  this  loan.2  It  must  have  been  regarded,  at  that  day, 
with  great  favor  as  a  mode  of  investment,  for  nothing  of  similar 

thought  to  be  the  first  mention  of  a  rate  of  interest  per  cent.  Four  per 
cent,  was,  no  doubt,  far  below  the  customary  charge  of  that  day  ;  but  whe 
ther  foreseen  or  not,  the  privileges  of  the  chamber  of  loans  soon  indemnified 
these  public  creditors  for  this  low  rate  of  interest. 

1  "  If  I  mistake  not,  this  bank  is  also  the  most  ancient  establishment  of 
a  permanent  national  debt,  or  the  funding  system,  which  is  now  carried  to 
such  a  height  in  almost  every  country  in  Europe."  —  APPherson's  Annals 
of  Commerce,  vol.  i.,  p.  342. 

2  "As  the  interest  of  the  loan  was  always  punctually  paid,  every  credit 
inscribed  on  the  book  of  the  chamber  of  loans  might  be  regarded  as  a  pro 
ductive  capital ;  and  by  laws,  these  inscriptions,  or  the  right  of  receiving 
the  interest  upon  them,  could  be  frequently  transferred  from  one  citizen  to 
another.     This  practice,  in  the  course  of  time,  exhibited  to  all  the  lenders 
how  very  simple  and  easy  was  the  process  of  paying  and  receiving  debts 
among  themselves  by  transfers  upon  these  books ;  and  from  the  moment 
that  the  advantages  which  commerce  might  derive  from  this  method  of  pay 
ing  debts  was  perceived,  bank  money  was  invented."  —  Econ.  Politique, 
par  Henri  Storch ;  vol.  iv.,  p.  95. 

19 


290  THE    BANK     OF    VENICE. 

convenience  and  availability  lias  ever  been  enjoyed,  or  was  then 
accessible.1  The  creditors,  being  thus  associated,  could  bring 
their  united  influence  to  bear  upon  the  government,  to  insure 
the  regular  payment  of  interest,  and  to  obtain  such  extension 
of  privileges  as  time  and  experience  showed  to  be  important 
and  valuable.  The  reimbursement  of  the  loan  ceased  to  be 
regarded  as  cither  necessary  or  desirable.  Every  creditor  was 
reimbursed  when  he  transferred  his  claim  on  the  books  of  the 
bank.  From  being  convenient  and  valuable  as  an  investment 
readily  obtained,  and  as  readily  disposed  of,  it  became,  by  a 
natural  process,  a  medium  of  payment  in  transactions  of  com 
merce.  That  fund,  which  was  desirable  to  all  seeking  invest 
ment,  would  be  willingly,  in  many  instances,  accepted  in  pay 
ment  of  debts  already  existing,  or  for  goods  just  purchased. 
There  is  good  reason  to  believe  that  this  fund  was  largely  used 
in  this  way  for  centuries  before  the  final  arrangements  were 
made,  of  which  our  accounts  are  more  clear.  It  is  not  unlikely 
that  irregularities  crept  into  the  mercantile  usages  of  the  bank ; 
that  transfers  were  made  otherwise  than  in  the  bank,  and  per 
haps  by  circulating  papers  or  checks  authorizing  the  bank  to 
make  transfers  for  the  amount  expressed  to  bearer.  Such  a 
practice,  unauthorized  by  the  State,  would  lead  to  confusion,  to 
mistakes,  to  forgery,  and  litigation.  Whatever  may  have  been 
the  malpractices  which  grew  up  in  the  usages  of  the  bank,  in  the 
first  two  hundred  and  fifty  years  of  its  history,  it  fully  vindi- 

1  "  There  was  at  Venice  that  which,  more  than  any  previous  commercial 
policy,  opened  men's  eyes  to  an  advantage  of  great  importance,  contributing 
alike  to  the  prosperity  of  the  State,  and  to  the  benefit  of  trade.  She  was 
the  glorious  inventress  of  the  Guarantied  Bank  [banco  garantito],  differing 
both  in  its  operations  and  by  its  security  from  common  banks,  as  much  as 
from  those  called  public  banks.  For,  in  the  case  of  the  Guarantied  Bank, 
if  robbery  occurs,  if  the  servants  and  official!  of  the  bank  commit  fraud,  if 
the  managers  administer  it  badly,  the  government  is  held  responsible  for 
the  whole ;  no  private  person  suffers  any  loss.  But  in  the  case  of  other 
banks,  the  government  is  only  bound  to  do  justice,  by  giving  all  the  assist 
ance  it  can  in  the  discovery  and  punishment  of  the  criminals,  and  for  the 
recovery  of  the  loss."  —  Broggia  Trattate  delle  Monete,  vol.  ii.,  p.  270, 
being  vol.  v.  in  Custodies  Collection  of  the  Economist  Italiani. 


THE     BANK     OF    VENICE.  291 

cated,  in  that  period,  its  power  and  utility  as  a  financial  agent 
of  the  republic,  and  its  efficiency  in  promoting  the  movements 
of  commerce. 

There  is  no  question,  although  we  have  not  the  details,  that 
the  government  had  found  it  perfectly  easy  to  enlarge  the 
amount  of  the  original  loan  or  stock  of  the  bank,  as  the  demand 
for  its  funds  generally  exceeded  the  supply.  All  money  deposited 
for  the  purpose  of  obtaining  a  credit  in  bank  was  accounted  an 
addition  to  the  original  loan,  and  as  such  taken  into  the  public 
treasury  as  money  lent  to  the  State.  Every  such  investment 
increased  the  stock  of  the  bank,  and  replenished  the  treasury  of 
the  republic.  If  individuals  could  make  purchases  and  pay 
debts  by  transfers  in  bank,  the  public  treasury  could  well  afford 
to  receive,  in  payment  of  its  dues,  credits  in  bank,  as  that  would 
be  only  equivalent  to  taking  up  its  own  obligations.  Thus,  the 
more  these  credits  were  employed,  the  more  the  demand  for  them 
increased,  the  more  rapidly  money  flowed  into  the  treasury,  and 
the  more  readily  the  government  could  afford  to  receive  payment 
of  its  revenues  in  the  funds  of  the  bank.1 

The  way  was  opened,  by  the  experience  of  two  centuries  and 


1  "  By  degrees  the  government  introduced  the  usage  of  making  certain 
payments  by  drawing  upon  the  bank,  in  place  of  making  them  in  specie. 
It  commenced  by  receiving  these  drafts  into  the  public  treasury  without 
hesitation ;  and  when  this  usage  became  established,  a  law  was  passed, 
that  bills  of  exchange  might  be  paid  in  money  of  the  bank,  whether  foreign 
or  domestic,  when  drawn  for  above  the  sum  of  three  hundred  ducats.  These 
drafts  could  not  be  refused,  unless  stipulation  had  been  made  to  the  con 
trary." —  Darn,  de  Hist.  Venice,  vol.  iii.,  p.  73. 

"  To  give  these  bank  credits  great  rapidity  of  circulation,  an  account  of 
debit  and  credit  was  opened  with  every  proprietor,  admitting  of  the  prompt 
transfer  of  credits;  and  that  these  might  be  readily  effected  and  accepted 
with  safety,  it  was  decreed  that  they  should  not  be  seized  in  execution  for 
debt,  nor  be  the  subject  of  mortgage."  —  Ibid.,  p.  74. 

This  statement  may  not  be  strictly  correct,  in  asserting  that  the  enact 
ment,  that  all  payments  not  otherwise  agreed  should  be  made  in  bank,  was 
the  result  of  the  use  which  the  government  had  made  of  the  bank.  This 
decree  was  the  result  of  the  efficiency  of  the  bank,  as  long  experienced  and 
admitted,  and  of  the  confidence  that  both  the  people  and  the  government 
would  derive  great  advantage  from  the  measure. 


292  THE    BANK     OF     VENICE. 

a  half,  for  the  next  chief  characteristic  of  the  Bank  of  Venice. 
In  the  year  1428,  in  the  administration  of  the  Doge  Thomas 
Moncenigo,  it  was  decreed  that  all  bills  of  exchange  payable  in 
Venice,  whether  domestic  or  foreign,  should  be  paid,  unless 
otherwise  stipulated  and  so  expressed,  in  the  bank  ;  and  that  all 
payments  in  gross,  or  in  wholesale  transactions,  should  be 
effected  also  in  bank.  This  at  once  brought  the  mass  of  the  pay 
ments  of  that  great  commercial  city  to  the  bank.1  Whatever 
irregularities,  and  whatever  confusion  had  prevailed,  this  intro 
duced  a  uniform  and,  from  long  familiarity  with  the  bank,  an 
intelligible  system.  The  endless  diversity,  and  bad  condition 
of  the  coins  circulating  in  Venice  were  a  sufficient  recommenda 
tion  of  the  new  regulation  to  all  who  had  not  very  special  rea 
sons,  indeed,  for  disliking  it.  This  measure  at  once  created 
a  great  additional  demand  for  the  funds  of  the  bank,  and 
brought  large  sums  into  the  public  coffers.  The  government, 


1  "  It  was  established,  by  a  solemn  edict  of  the  Republic,  that  all  pay 
ments  of  merchandise  in  gross,  and  of  bills  of  exchange,  should  be  made 
only  in  bank ;  and  that  all  debtors  should  carry  their  money  to  the  bank,  to 
receive  credits  in  bank  therefor;  and  that  creditors  should  receive  payment 
in  bank,  by  a  simple  transfer  from  their  debtors.  He  who  WHS  creditor 
upon  the  books  of  the  bank  became  debtor  as  soon  as  he  had  made  his 
transfer,  or  payment,  to  another,  -who  became  creditor  in  his  place.  Thus 
the  parties  did  but  change  their  position,  without  its  being  necessary  to 
make  any  payment  in  money  (reel  et  effectif)."  —  Saverij's  Diet,  de  Com., 
Art.  "Banque,"  vol.  i.,  p.  277. 

"By  this  means  the  Republic  of  Venice,  without  restricting  the  course 
of  trade,  became  the  mistress  of  the  money  of  the  people  ;  and  without  being 
obliged  to  resort  to  extraordinary  taxes  to  sustain  the  war  against  the 
Turks,  so  long  protracted,  it  drew  to  the  bank,  and  thence  to  the  public 
treasury,  the  sums  of  which  it  had  need,  without  resorting  to  loans,  so  often 
prejudicial  to  commerce.  The  credit  granted  by  the  government  on  the 
books  of  the  bank  for  this  money  continued  to  perform  the  same  functions 
as  the  money.  Although,  for  distinction,  called  imaginary  money,  it  was 
equivalent  to  real  money,  since  it  had  the  same  value.  No  one  believed 
himself  less  rich  from  his  money  being  all  in  the  bank,  because,  with  his 
credit  in  the  bank,  he  could  obtain  money  when  he  wished  ;  whilst  the  Re 
public,  from  this  bank,  and  the  credit  which  it  had  given  it,  drew  effective 
succor  for  its  wants,  an  aid  which  it  never  could  have  received  by  taxa 
tion."  —  Farfait  Negotiant,  vol.  i.,  p.  464. 


THE     BANK     OF    VENICE.  293 

however,  no  longer  paid  interest  for  the  sums  received  from  the 
bank.  The  funds  obtained  in  this  way  were  brought  to  the  bank 
for  the  payment  of  bills  of  exchange,  and  were  paid  in  for  that 
purpose,  and  not  with  a  view  to  interest.  The  rapid  succession 
of  payments  occurring  at  a  point  where  all  the  payments  of  Ve 
netian  commerce  were  accomplished,  made  the  intervals  during 
which  the  funds  remained  in  the  hands  of  any  one  merchant  too 
short  to  make  him  solicitous  about  interest  on  balances  or  depo 
sits.  As  all  payments  of  the  kind  above  designated  were,  by 
law,  to  be  made  in  bank,  unless  otherwise  agreed,  and  as  that 
mode  of  payment  was  far  more  convenient,  it  became  almost  the 
exclusive  usage  of  trade.  All  who  had  engagements  to  meet, 
found  them  in  the  bank :  of  course,  all  such  provided  the  bank 
funds  necessary  to  meet  them,  or  carried  to  the  bank  the  amount 
of  coins  requisite  for  the  purpose.  The  government  continued 
to  take  all  money  paid  in  as  a  consideration  for  allowing  an  in 
scription  on  the  books  of  the  bank  to  the  credit  of  the  depositor. 
The  sums  which  thus  flowed  through  the  bank  into  the  treasury 
would,  with  the  previous  bank  funds,  make  up  the  quantity  need 
ful  for  the  convenient  discharge  of  the  commercial  payments  of 
Venice.  As  this  amount  fluctuated  from  year  to  year,  and 
during  each  year,  with  the  course  of  commerce,  a  very  effective 
mode  of  accommodating  the  supply  of  bank  funds  to  the  exigen 
cies  of  the  demand  came  obviously  into  use.  When  the  payments 
in  bank  were  heavy,  and  the  bank  funds  in  great  demand,  money 
flowed  freely  into  bank,  and  the  credits  were  proportionably  in 
creased.  When  an  occasional  demand  for  the  precious  metals 
arose,  the  holders  of  bank  funds  could  readily  dispose  of  them 
at  a  slight  reduction  for  coins.  The  purchasers  of  bank  funds 
were  sure  of  meeting  soon  a  demand  for  them ;  for  the  demand 
for  a  medium  in  which  the  ever-recurring  payments  of  debts 
were  made  so  much  exceeded  in  intensity  the  occasional  demand 
for  specie  for  exportation,  or  any  other  use,  that  during  the 
whole  existence  of  the  bank,  with  very  slight  exception,  the 
bank  fund  was  at  a  large  premium  over  coins,  so  large  that  it 
was  finally  fixed  by  law  at  '20  per  cent.1 

1  A  full  explanation  of  the  agio,  or  premium  of  the  bank  funds,  in  Venice, 
will  be  given  infra. 


294  THE     BANK     OF    VENICE. 

The  republic  could  well  afford  to  maintain  a  liberal  policy 
towards  an  institution  so  important,  both  as  a  fiscal  and  com 
mercial  agent.  That  the  inhabitants  of  Venice  were  well  satis 
fied,  we  cannot  doubt,  as  not  an  objection  was  ever  made  to  the 
bank,  at  least  none  is  extant ;  neither  book,  nor  speech,  nor 
pamphlet,  have  we  found,  in  which  any  merchant  or  dweller  in 
Venice  ever  put  forth  any  condemnation  of  its  theory,  or  its 
practice.  There  was  no  hesitation  in  carrying  money  to  the 
bank,  so  long  as  it  was  not  doubted  that  bank  funds  would  pur 
chase  specie  without  loss,  whenever  it  might  be  needed ;  and  the 
uniform  premium  of  bank  funds  settled  that  point.  Under  such 
a  system,  the  regular  payments  of  trade  would  proceed  with  a 
rapidity  and  economy  previously  unknown,  so  far  as  the  history 
of  commerce  informs  us.  In  this  aspect,  it  deserves  special 
examination. 

"  If  Jean,  Pierre,  Claude  and  Jacques,  and  consecutively  e-very  inhabi 
tant  of  the  same  town,  had  but  one  banker,  who  kept  an  account  with  each 
one  of  them  in  a  register  provided  for  the  purpose,  this  banker  could  make 
all  their  reciprocal  payments  without  moving  a  cent  of  their  money,  since 
it  would  suffice  simply  to  write  upon  his  register  the  receipt  from  one,  and 
the  payment  by  another  ;  from  which  would  result  two  things  —  they  would 
avoid  the  trouble  of  receiving  and  counting  money,  and  the  expense  of  each 
having  a  cashier  and  book-keeper. 

"Another  respect  in  which  the  position  of  this  banker  would  be  advanta 
geous  to  them  would  be,  that  he  could  put  the  money  of  all  to  good  use, 
without  diverting  it  from  its  proper  destination,  or  interrupting  the  pro 
gress  of  their  payments,  which  would  be  effected  there  by  means  of  his 
books.  And  a  third  advantage  would  arise  if  this  same  banker  would  lend 
the  money  thus  economized  to  his  customers,  by  which  they  could  augment 
their  trade,  both  at  home  and  abroad. 

"  This  is  what  the  Republic  of  Venice  happily  accomplished  by  the  esta 
blishment  of  its  bank,  which  became  a  perpetual  banker  for  its  inhabitants. 
It  received  from  them  the  money  previously  employed  in  payment  for  mer 
chandise  in  gross,  and  of  bills  of  exchange ;  for,  by  public  edict,  all  pay 
ments  for  merchandise  in  gross  were  to  be  made  only  in  bank.  All  debtors 
were  obliged,  for  this  purpose,  to  carry  their  money  to  bank,  and  to  receive 
credit  therefor,  and  all  creditors  to  receive  payment  there.  Every  payment 
was  made  by  a  simple  transfer  of  a  credit  upon  the  books  of  the  bank  from 
one  to  another.  He  who  was  a  creditor  upon  the  book  of  the  bank  became 
debtor  as  soon  as  he  had  assigned  to  another,  who  thus  became  a  creditor 
in  his  place ;  and  so  on,  from  one  to  another,  the  parties  simply  changing 


THE    BANK     OF    VENICE.  295 

their  position  of  debtor  and  creditor,  without  any  necessity  of  a  payment 
in  money."  ' 

If  there  were  a  thousand  accounts  opened  in  the  bank  by  the 
chief  men  of  trade  in  Venice,  they  would  be  found  to  be  all  pay 
ing  as  well  as  receiving,  and  the  sums  to  be  paid  would  be  mainly 
to  each  other.  There  would,  therefore,  be  a  vast  sum  in  the 
aggregate  payable  yearly  by  persons  in  Venice  to  persons  in 
Venice.  If  the  whole  number  of  such  persons  be  taken  by  con 
jecture,  as  above,  at  a  thousand,  then  nearly  the  whole  sum 
owing  by  all  of  them  would  be  receivable  by  all  of  them.  It 
would,  to  a  large  extent,  be  a  mutual  debt  among  the  thousand, 
each  one  having  to  pay  to  others  not  far  from  the  same  amount 
he  was  to  receive.  If  the  whole  sum  to  be  paid  and  received 
annually  was  a  hundred  and  twenty  millions,  the  monthly  pay 
ment  would  be  ten  millions,  and  the  daily  over  three  hundred 
thousand.  The  amount  of  bank  funds  which  would  be  sufficient 
to  meet  such  a  daily,  monthly,  or  yearly  aggregate,  experience 
and  time  could  alone  fully  teach.  It  would  depend  on  the 
rapidity  of  the  movement ;  on  the  regularity  with  which  the  paper 
matured ;  on  the  degree  of  confidence  subsisting  among  the  par 
ties,  which  would  lead  them  to  favor  each  other  by  short  loans, 
from  those  who  could  spare  for  a  brief  time  to  those  whose  re 
ceipts  did  not,  for  the  time,  correspond  with  their  payments. 
The  whole  fund  in  the  bank  would  thus  move  in  a  circle  among 
its  customers,  each  one  receiving  and  paying  yearly  according 
to  the  extent  of  his  business.  The  fund  would  Substantially 
remain,  all  the  time,  among  the  same  persons,  only  varying  in 
the  distribution.2 


1  Parfait  Negotiant,  vol.  i.,  p.  463. 

2  It  was  from  this  movement  in  a  circle,  the  efficacy  of  which  was  fully 
perceived  in  Venice,  that  the  bank  took  the  name  by  which  it  was  long 
called  in  Europe,  BANCO  DEL  GIRO.     It  was  seen  that  each  day's  business 
caused  the  transfer  of  a  large  amount  of  the  bank  credits,  and  a  correspond 
ing  change  of  ownership  ;  and  that  this  change  took  place  day  after  day, 
and  yet,  at  the  end  of  a  year  of  these  daily  changes,  the  whole  credits  be 
longed  to  nearly  the  same  persons,  though  not  perhaps  in  the  same  propor 
tions.  It  was  as  if  they  were  moving  in  a  circle,  of  which  each  day  was  a  step  ; 
but  whether  moving  slow  or  fast,  they  could  not  go  beyond  the  enclosure. 


296  THE    BANK    OF    VENICE. 

It  is  worthy  of  remark,  that  this  very  efficient  mode  of  adjust 
ment  discovered  and  used  so  largely  at  this  early  period  in  the 
history  of  commerce,  was  not  dependent  for  its  efficacy  on  the 
guarantee  of  the  republic.  That  guarantee  sprung  out  of  the 
mode  in  which  the  bank  originated :  this  convenient  method  of 
liquidation  sprung  from  the  use  of  this  new  substitute  for  money. 

The  facility  of  payment  furnished  by  the  bank,  which  made 
it  the  admiration  of  Europe,  honorable  at  once  to  the  government 
and  merchants  of  Venice,  and  a  support  to  the  pride  and  power 
of  its  people,  consisted  in  substituting,  as  a  medium  of  payment, 
the  debt  of  the  republic  for  current  coin.  The  coin  in  circula 
tion  in  Venice  was,  in  many  respects,  a  nuisance  of  the  most 
vexatious  kind.  It  consisted  not  only  of  the  variety  which  the 
many  mints  of  Italy  at  all  times  afforded,  but  of  that  vastly  in 
creased  variety  which  had  accumulated  from  the  coinage  of  more 
than  a  century.  Besides  this  multiplicity  of  the  new  and  old 
coins  of  Italy,  was  the  coinage  of  many  countries  of  the  far  East 
with  which  Venice  carried  on  a  vast  commerce.  To  make  all 
the  payments  of  the  domestic  and  foreign  trade  of  Venice  in 
these  coins,  of  different  degrees  of  purity,  and  many  of  them 
much  deteriorated  by  wear,  required  time,  patience,  and  skill, 
which  but  few  merchants  could  adequately  command.1  The 

It  was  well  understood,  too,  in  that  day,  that  if  coins  had  been  employed 
in  such  an  adjustment,  they  would  have  performed  the  same  rotary  move 
ment,  so  far  as  they  could  be  made  to  effect  it. 

"  Car  sans  debourser  aucune  somme,  il  s'y  fait  a  toute  heure  des  paye- 
mens  pour  les  quels  il  ne  faut  que  changer  de'nom  des  parties:  de  sorte 
que  les  sommes  y  ROULENT  de  Vun  a  I'autre  sans  sortir  des  coffres  des  Prince, 
que  jouit  de  ce  fond  sans  payer  aucune  interet."  .  .  .  "On  1'appello 
Banco  del  Giro  it  cause  de  tours  perpetuels  que  1'argent  y  fait.  —  Traite 
Generate  du  Commerce,  par  S.  Ricard,  1732,  page  301. 

1  With  all  the  advantages  of  their  bank,  the  Venetians  were  extremely 
careful  to  restrain  abuses  of  their  coinage.  Their  coins  enjoyed  a  high 
reputation  for  purity  throughout  the  world.  They  punished  those  who 
were  guilty  of  infringing  the  laws  for  the  protection  of  the  coinage  with 
whipping,  and  other  severe  penalties.  Persons  were  equally  prohibited 
from  paying  or  -receiving  coins  at  a  rate  more  or  less  than  the  nominal 
value.  No  doubt  one  effect  of  this  strictness  was  to  promote  payments 
in  the  bank  in  a  fund  which  the  mischiefs  of  coinage  could  not  reach. 


THE    BANK    OF    VENICE.  297 

facility  offered  by  the  government,  through  the  bank,  saved  all 
this.  The  government  took  the  coins  one  time  for  all,  giving 
therefor  a  corresponding  credit  in  the  bank ;  and  allowed  the 
depositor  or  lender  to  transfer  this  credit  claim  upon  the  republic 
in  payment  of  his  debt,  in  place  of  transferring  or  paying  over 
the  coin  in  each  payment.  Whatever  men  can  employ  in  pay 
ment  of  debts,  they  will  be  willing  to  receive  in  payment,  and 
this  independent  of  any  legal  compulsion. 

Experience  soon  evinced  the  power  and  convenience  of  this 
mode  of  payment.  These  bank  credits  were  divisible  to  every 
desirable  degree,  and  they  could  be  transferred  with  a  readiness, 
speed  and  safety,  beyond  all  comparison,  superior  to  any  mode 
of  paying  in  coin.  The  same  sum  or  credit  might  be  kept  in 

Foreign  coins  were  only  allowed  to  be  introduced  into  the  city  under  very 
special  regulations.  Dealing  in  coins  by  private  or  public  banks  was  pro 
hibited  under  sevpre  penalties.  All  coins  to  be  changed  or  sold  were  to  be 
carried  to  an  office  opened  for  the  purpose  at  the  mint ;  the  determination 
of  the  authorities  being  to  protect  the  mass  of  the  people  from  all  the  evil 
practices  of  dealers  in  coins.  All  contracts  made  payable  in  coins  were  to 
be  at  the  rate  named  in  the  law.  Every  tradesman  or  laborer  induced 
or  compelled  to  take  any  coin  otherwise  than  at  the  legal  rate,  was 
enjoined  to  make  known  the  facts  to  a  court  of  justice,  and  exhibit  the 
money  paid  to  him ;  upon  which  the  party  paying  him  this  money  was  not 
only  compelled  to  give  him  legal  money,  but  to  pay  him  also  twenty-five 
ducats  of  a  fine. 

Every  person  carrying  money  into  Venice  was  obliged  to  submit  it  to  the 
inspection  of  a  public  officer  at  the  mint.  Any  failure  to  comply  with  this 
involved  a  forfeiture  of  the  coins  so  introduced  into  the  country. 

Officers  from  the  mint  were  required  to  pass  daily  through  the  city,  visit 
ing  especially  places  of  dealing,  to  give  information,  to  detect  offenders,  and 
to  see  the  kind  of  coins  in  circulation.  These  officers  were  not  permitted  to 
receive  compensation  of  any  kind,  but  were  to  render  their  services  free  to 
the  people. 

These  regulations  were  printed,  and  fixed  in  conspicuous  places  through 
out  the  city.  Informers  were  not  only  encouraged,  and  their  names  kept 
secret,  but,  in  many  instances,  they  were  largely  compensated  out  of  the 
pockets  of  the  offenders.  The  severity  of  these  laws  is  such,  in  fact,  that 
it  is  difficult  to  imagine  what  could  have  been  the  extent  of  the  abuses 
which  made  them  necessary.  For  full  details,  see  Marperger  on  Banks, 
pp.  180  to  189,  4to  :  BerscJireibung  der  Banqiien,  von  J.  P.  Marperger,  Leip- 
BIC,  1717. 


298  THE     BANK    OF    VENICE. 

such  rapid  circulation,  as  to  effect  an  amount  of  payments,  in  a 
specified  time,  far  beyond  any  possible  movement  of  coin.  This 
rapidity  became  a  great  economy,  for  a  much  less  sum  of  credits 
was  made  to  effect  a  given  amount  of  payments  with  far  greater 
speed  than  could  have  been  attained  with  coin.  But  this 
economy  resulting  from  increased  speed  and  power  of  circulation 
was  still  more  important,  arising  from  the  fact  that  the  coins 
which  were  deposited  as  the  basis  of  the  credit  were  very  soon 
again  restored  to  the  usual  channels  of  circulation  by  the  pay 
ments  of  government.  Thus  the  coin  was  not  withdrawn  from 
its  proper  functions,  and  the  credits  remained  a  perpetual  fund, 
to  be  employed  in  large  payments.  This  system  of  payments 
was  so  well  adapted  to  the  exigencies  of  commerce,  that  it  wTas 
maintained  in  full  vigor,  in  the  great  commercial  city  of  Venice, 
for  almost  four  hundred  years.  It  was  an  institution  or  device 
of  the  credit  system,  for  by  its  aid  payments  were  effected,  and 
that  to  a  vast  amount  annually,  without  any  use  of  coins  or 
bullion.  It  only  perished  when  the  city  itself  fell,  at  the  con 
quest  of  Italy  by  Napoleon ;  but  the  conqueror  carried  off  no 
coin,  no  penny  of  prey.  The  credits  of  the  bank  were  crushed 
under  the  rude  touch  of  an  invading  foe.  They  were  lost  to  the 
proprietor,  but  no  equivalent  passed  into  the  hands  of  the  de 
stroyers.  If  the  holders  of  these  credits  suffered,  the  invaders 
were  not  enriched.  In  assuming  the  sovereignty  of  Venice,  the 
conqueror  assumed  the  right  and  the  duty  of  making  good  these 
bank  credits. 

In  some  respects,  these  bank  credits  of  Venice  approximated 
to  the  power  and  convenience  of  the  bank  deposits  of  our  day ; 
and,  but  for  certain  regulations,  they  might  have  been  fully  as 
efficient.  Some  of  these  regulations  will  be  noticed  as  we  pro 
ceed. 

Experience  finally  dictated  that  the  convenience  of  merchants 
required  a  facility,  in  certain  transactions,  which  the  bank  as 
constituted  did  not  afford.  This  was  simply  a  place  of  deposit — 
a  bank,  or  office,  in  which  coins  or  bullion  could  be  deposited  in 
safety,  with  the  right  of  withdrawal  at  pleasure,  or  of  transfer 
ring  the  ownership,  if  desirable.  To  meet  this  requirement,  the 


THE     BANK     OF    VENICE.  299 

government  established  such  an  institution  as  a  second  or  co 
ordinate  department  of  the  bank.  It  was  provided  that  money 
should  be  received  and  credited,  on  the  books  of  this  office,  to 
the  depositor.  This  measure  was  completely  successful.  The 
republic  having  previously  kept  good  faith  with  its  citizens,  they 
did  not  doubt  that  the  plan  of  the  new  establishment  would  be 
carried  out  with  equal  fidelity.1 

Those  who  received  money  for  which  they  had  no  immediate 
use,  and  foreign  merchants  making  purchases  in  Venice  to  carry 
to  their  own  country,  could  thus  deposit  their  coins  in  a  safe  place, 
and  wait  till  the  course  of  business  determined  what  mode  of 
disposition  would  be  most  beneficial  or  convenient.  Such  depo 
sitors  could  not  only  withdraw  their  deposit,  but  could  transfer 
the  right  to  withdraw  it,  or  its  equivalent  in  other  coins :  so  that 
the  funds  of  this  deposit  branch  were  always  liable  to  be  with 
drawn.  It  became,  of  course,  the  depository  for  that  large 
amount  of  money  which,  in  every  commercial  community,  must 
be  kept  ready  for  any  occasion  which  the  fluctuations  of  busi 
ness,  or  public  affairs,  might  disclose.  Those  even  who  had  bills 
to  pay  with  their  money  in  a  short  time,  making  it  necessary  to 
carry  it  into  that  ancient  branch  of  the  bank,  from  whence  it 
would  pass  into  the  public  treasury,  might  prefer  retaining  it  in 
their  power  until  their  payments  matured.  The  convenience  of 
this  depository  would  lead,  no  doubt,  to  making  many  bills  of 
exchange,  and  other  liabilities,  payable  in  coin,  which  had  for  a 
long  time,  under  the  law  and  usages  of  commerce,  been  payable 
in  bank  funds.  Parties  contracting  previously  having  the  privi 
lege  of  making  debts  payable,  by  so  expressing  the  contract,  in 
coins,  preferred  omitting  that  stipulation,  as  the  mode  of  paying 
in  bank  funds  was  the  most  advantageous  and  convenient.  But, 
under  the  regulation  of  the  new  depository,  the  convenience  be 
came  equal  in  each  department,  and  other  considerations  would 


"  The  necessity  which  existed,  of  making  occasional  payments  in 
money,  gave  rise  to  the  opening  of  a  cash  office  (Caisse  de  Comptant)  for 
those  \vho  wished  to  be  paid  in  coins.  Experience  proved  that  this  mea 
sure  did  not  cause  any  sensible  diminution  in  the  funds  of  the  bank."  — 
Diet,  de  Com.,  par  Savary,  Article  "Bangiie,"  p.  276. 


300  THE    BANK    OF    VENICE. 

determine  the  choice.  The  success  of  this  depository  did  not 
check  the  flow  of  money  into  the  public  coffers,  as  the  demand 
had  always  been  greater  than  the  supply  of  bank  funds,  and 
therefore  caused  no  complaint  nor  disappointment  on  that  ground. 
It  was  perfectly  apparent  that  the  bank,  by  this  addition,  had 
become  a  vastly  more  efficient  and  useful  institution ;  and  the 
whole  policy  of  the  republic  shows  that  the  importance  of  a 
steadfast  and  firm  support  of  the  bank  was  perfectly  understood. 
A  large  amount  of  specie  rapidly  accumulated  in  the  depository, 
which  was  transferred  on  its  books  from  one  person  to  another, 
in  the  same  mode  as  in  the  other  departments  of  the  bank.  It 
was,  therefore,  made  to  perform  the  'adjustments  of  commerce, 
so  far  as  applicable,  as  efficiently  as  the  other,  while  the  fund 
was  constantly  at  the  disposition  of  its  owners.  It  bore  no  in 
terest,  and  was  therefore  only  profitable  by  the  intermediate  use 
thus  made  of  it.  The  advantage  to  the  holders  was,  that  while 
they  could  dispense  with  keeping  coins  for  occasional  employ 
ment  as  such,  they  could  be  made  available  for  current  payments 
in  the  new  depository.  Of  course  the  amount  thus  kept  would 
be  small,  in  comparison  with  that  fund  which  would  be  employed 
exclusively  in  effecting  the  ever-recurring  payments  of  the  great 
mass  of  liabilities  constantly  in  course  of  liquidation.  It  would 
also  be  exceedingly  fluctuating,  because  it  would  correspond  with 
the  changes  of  trade  in  each  year,  and  from  year  to  year.  In  these 
respects  it  would  simply  keep  pace  with  the  exigencies  of  com 
merce  ;  no  external  force  or  power  would  restrain  its  limits  at  one 
time,  and  unduly  extend  them  at  another.  It  would  be  perfectly 
elastic  arid  impressible  to  the  movements  of  trade.  None  of  the 
mischances  of  commerce  could  be  charged  to  it,  for  it  simply 
performed  the  duty  of  a  depository,  and  permitted  a  change  of 
ownership  of  the  sums  deposited  to  any  extent  desired.  It  was 
a  servant,  not  a  master.  Bound  by  certain  rules,  from  which  it 
dare  not  swerve,  it  exercised  no  discretion. 

It  was  found,  in  process  of  time,  that  although  the  amount 
of  the  deposit  thus  made  fluctuated  largely,  yet  a  great  sum 
remained  unmoved  by  any  emergency  of  business.  This  was, 
in  part,  taken  by  the  government  on  occasions  of  pressing 


THE    BANK    OF    VENICE.  SOI 

• 

need.1  On  two  occasions  this  cash  office  suspended  payments  ; 
and  on  one  of  these  the  suspension  was  continued  for  several 
years :  jet  such  was  the  confidence  in  the  government,  and  so 
accustomed  were  the  people  to  the  operations  of  the  older  branch, 
that  the  transfers  of  these  removed  deposits'  proceeded,  during 
the  suspension,  as  if  the  specie  were  still  present,2  the  govern 
ment  receiving  them  in  all  payments  to  it ;  so  that,  during  the 
period  of  the  suspension,  the  two  departments  of  the  bank  were 
resolved  into  one,  as  to  their  mode  of  operation,  the  fund  in  each 
being  equally  a  public  debt,  but  not  of  equal  value,  for  the  old 
bank  credits  maintained  their  advantage  in  that  respect  under 
all  changes.  The  government  seized  the  first  opportunity  of 
enabling  the  cash-office  to  resume  its  payments,  and  the  whole 
current  of  this  department  of  the  bank  fell  into  its  appropriate 
channels. 

The  original  capital,  or  subscription,  which  constituted  the 
bank,  is  stated  to  have  been  2,000,000  of  ducats.  In  the  middle 
of  the  18th  century,  the  amount  was  estimated  at  5,000,000 ; 
and  towards  the  end  of  that  century,  at  the  close  of  its  long  and 

1  "  Its  credit  was  so  fully  established  in  the  end,  that  although  it  was 
•well  known  that  the  government  had  withdrawn  a  portion  of  the  funds  of 
the  cash-office  upon  two  occasions  of  great  public  necessity,  upon  which 
this  department  of  the  bank  suspended  payments  (in  1600  and  1717),  and 
although  these   suspensions  were  unexpectedly  prolonged,  the   funds  of 
neither  branch  suffered  serious  or  general  discredit.     The  confidence  that 
the  republic  would  make  all  right  was  unshaken.    It  was  believed,  too,  that 
the  government  would  at  all  times  take  these  credits  for  anything  due  to 
the  public  treasury."  —  Dam,  Hist,  de  Venice,  vol.  iii.,  p.  74. 

2  "  During  the  progress  of  the  war  against  the  Turks,  the  republic  having 
exhausted  its  treasury,  was  constrained  to  suspend  payments  at  this  cash- 
office,  which  caused  some  diminution  of  the  credit  of  the  bank ;  neverthe 
less,  it  did  not  interrupt  its  regular  business.     All  the  evil  which  it  pro 
duced  was,  that  those  who  were  afraid  resorted  to  persons  who  relieved 
them  by  giving  them  ready  money  for  their  bank  credits,  at  ten  or  fifteen 
per  cent,  discount.     Several  years  afterwards  the  republic,  upon  occasion 
of  a  new  coinage,  returned  the  money  to  the  cash-office,  and  restored  it  to 
its  full  functions  and  high  place  in  public  opinion.     The  credits  of  this 
office  were  soon  again  at  par  with  the  precious  metals,  and  so  remained." 
—  Parfait  Negotiant,  vol.  i.,  p.  404. 


802  THE    BANK     OF    VENICE. 

• 

and  successful  career  of  five  hundred  years,  at  14,000,000  or 
15,000,OOOJ 

We  have  no  means  of  determining  the  actual  efficiency  of  the 
fund  thus  employed  in  the  payments  of  Venice.  There  does 
not  appear,  in  the  notices  of  the  bank  left  to  us,  any  limitation 
to  the  circulation  or  transfers  of  the  credits  on  its  books.  Every 
precaution,  apparently,  was  taken  to  prevent  mistakes ;  and 
every  transfer  made  by  the  clerks  of  the  bank,  in  the  presence 
of  the  parties,  or  their  agents  duly  authorized,  bore  on  its  face 
the  nature  of  the  transaction.2  No  receipt  or  voucher  was  neces 
sary,  when  a  payment  was  made  in  bank,  as  the  transfer  in  pay 
ment  was  regarded  as  the  best  evidence,  being  sufficiently  expla 
natory  to  show  the  actual  nature  and  occasion  of  the  payment. 
It  is  not  improbable  that  the  whole  fund  of  the  bank  performed 
payments,  in  the  aggregate,  annually  to  five  hundred,  and  per 
haps  a  thousand-fold  the  amount. 

It  does  not  appear  that  any  tax  was  imposed  upon  these  bank 
credits,  except  a  collateral  inheritance  tax  of  ten  per  cent.,  when 
the  funds  of  the  bank  descended,  or  were  devised  by  a  deceased 
proprietor,  to  collateral  heirs ;  and  a  forfeiture,  or  escheat  to  the 
state,  of  such  deposits  or  funds  as  belonged  to  proprietors  de 
ceased  intestate  without  heirs.  Both  these  were  discontinued  as 
soon  as  the  necessities  of  the  public  treasury  permitted. 

The  Bank  of  Venice  enjoyed  a  reputation,  throughout  tho 
commercial  world,  which  greatly  promoted  the  success  of  Vene- 

1  Ilistoire  de  Venice,  par  Daru,  vol.  iii.,  p.  75. 

2  The  mode  of  making  the  bank  transfers,  and  specimens  of  the  forms  of 
entries,  may  be  seen  in  Postlethwaitc' s  Dictionary,  Art.  'Venice;'  and  in 
the  Encyclopaedia  Metkodique,  Commerce,  vol.  i.,  Art.  *  Banquet    The  alpha 
bet  was  subdivided,  and  each  person  applied  to  the  book-keeper  to  whose 
subdivision  the  letters  of  his  name  assigned  him.     Every  subdivision  had 
two  clerks,  by  whom  all  transfers  and  entries  were  made.     The  party 
making  a  transfer  appeared  before  these  two  clerks,  and  dictated  the  entry 
or  transfer  to  be  made,  and  both  clerks  wrote  in  separate  books  from  that 
dictation.     The  entry  specified  what  was  paid,  whether  a  bill  of  exchange, 
or  balance  of  account,  &c.,  and  if  a  bill,  where  drawn,  or  in  some  way 
designated  the  bill.     This  made  the  entries  on  the  books  of  the  bank  good 
evidence  for  all  payments,  and  safe  vouchers. 


THE     BANK     OF    VENICE.  303 

tian  trade.  It  was  a  tower  of  financial  strength  to  the  republic 
in  her  long  and  expensive  wars,  and  of  course  contributed  no 
small  share  to  the  celebrity  of  the  city,  as  well  as  to  its  power 
and  wealth,  v  That  the  advantage  of  such  an  institution  to  com 
merce  was  early  and  fully  comprehended  by  the  Venetian  mer 
chants,  is  evident  from  the  fact  that  those  engaged  in  their 
Eastern  trade  established  a  bank  in  Damascus,  of  which  we  only 
know  that  it  was  the  repository  of  great  treasure  when  that  city 
was  taken  and  pillaged  by  an  Eastern  conqueror,  early  in  the 
15th  century. 

"  This  bank  was  established  on  such  judicious  principles,  and 
has  been  conducted,  through  the  revolution  of  many  centuries, 
with  such  prudence,  that  though  the  government  have  twice, 
since  its  establishment,  made  free  with  its  funds,  its  credit  has 
remained  inviolate  and  unimpeached."  l  This,  from  the  "Annals 
of  Commerce,"  is  one  of  many  loose  and  imperfect  accounts  of 
the  Bank  of  Venice  which  have  long  been  in  circulation,  trans 
ferred  from  one  work  to  another,  varied  and  mingled,  until  it  has 
become  a  complicated  task  to  extricate  the  true  from  the  false.  One 
of  the  more  recent  of  these  statements  we  give  entire  from  the  Lon 
don  Encyclopedia,  as  it  furnishes  occasion  to  correct  some  errors. 
"  The  original  subscription  fund  of  the  Bank  of  Venice  was 
2,000,000  Venetian  ducats,  equal  to  £433,333;  but  by  a  solemn 
edict  of  the  Senate,  the  whole  trading  community  of  the  republic 
were  compelled  to  deposit  their  money  in  bank,  with  which  a 
credit  was  opened  equal  to  the  deposit  made,  which  could  only 
be  made  available  for  transfer ;  so  that  not  only  the  subscribed 
capital,  but  also  the  aggregate  amount  of  the  deposits,  resolved 
themselves  into  a  national  debt. 

"  Whether  the  transfers  at  the  bank,  in  the  early  period  of 
its  establishment,  required  personal  attendance,  as  is  the  case 
of  transferring  the  national  debt-stock  at  the  Bank  of  England 

1  M'Pherson's  Annals  of  Commerce,  vol.  i.,  p.  341.  It  was  a  part  of  the 
fund  of  the  cash-office  which  was,  upon  emergency,  taken  by  the  govern 
ment  for  public  use,  and  subsequently  restored.  In  tho  mean  time,  the 
transfers  of  the  office  proceeded  as  if  the  specie  was  still  in  its  vaults.  The 
confidence  of  the  people  seems  not  to  have  been  impaired. 


304  THE    BANK    OF    VENICE. 

in  the  present  day,  or  whether  effected  on  written  orders  corre 
sponding  to  the  checks  in  the  present  English  practice  of  banking, 
does  not  appear :  but  be  that  as  it  might,  derangements  in  the 
social  economy  of  the  state  soon  ensued ;  the  agio,  or  difference 
between  the  current  money  and  transferable  amounts  at  the 
bank,  attained  the  rate  of  thirty  per  cent.  Yet  such  was  the 
insidious  and  illusive  nature  of  the  bank  system,  that  the  bank 
increased  in  popularity  in  proportion  to  the  extent  of  the  de 
rangement  that  ensued;  the  inconvenience  frequently  occasioned 
in  the  minor  transactions  of  commerce,  as  well  as  on  occasions 
of  citizens  or  strangers  requiring  money  to  defray  the  expenses 
of  foreign  journeys,  led,  in  the  course  of  time,  to  the  bank  pay 
ing  out  money.  Yet  such  was  the  influx  of  money,  which  the 
crusading  armaments  brought  from  all  parts  of  Western  Europe, 
that  after  the  system  of  making  payments  in  money  was  prac 
tised,  the  deposits  always  exceeded  the  demands.  At  a  later 
period,  when  the  Venetians  themselves  turned  crusaders  against 
the  Turks,  the  subscription  fund  of  the  bank  was  increased  to 
5,000,000  of  ducats,  the  whole  of  which  was  made  use  of  by  the 
Senate  to  aid  them  in  their  operations  of  warfare ;  and,  as  pre 
viously  stated,  throughout  the  whole  period  of  its  career,  it  was 
made  an  instrument  of  aggression  in  aid  of  political  aggrandise 
ment  :  yet  such  was  the  fortuity  of  circumstances,  and  for  seve 
ral  centuries  having  no  rivalry,  its  integrity  does  not  appear  to 
have  been  questioned  ;  the  derangements  occasioned  by  the  fluc 
tuation  of  the  agio  led  ultimately  to  an  edict  of  the  Senate,  fix 
ing  it  at  twenty  per  cent.,  at  which  rate  it  continued  up  to  the 
period  of  the  extinction  of  the  republic,  in  1797." 

It  is  very  clear  that  that  writer  did  not  go  far  for  his  infor 
mation.  There  is  no  doubt  that  the  rule  of  the  bank  required 
the  presence  of  the  party  transferring,  either  in  person  or  by 
attorney;  and  this  was  carried  so  far,  that  no  endorsed  bills  of 

1  London  Encyclopaedia,  Art.  "  Bank."  Laus  est  ab  hoste  laudari.  It 
is  apparent  that  the  Encyclopaedist  knew  very  little  about  the  Bank  of 
Venice,  and  that  he  had  not  taken  the  pains  to  digest  what  he  did  know. 
He  had  no  conception  of  it  as  a  system,  nor  of  its  efficiency  as  a  mode  of 
payment. 


THE    BANK    OF    VENICE.  305 

exchange  were  permitted.  The  payee,  or  his  attorney,  could 
alone  receive  payment. 

The  assertion  that  the  whole  trading  community  was  com 
pelled  to  deposit  their  money  in  the  bank,  is  a  great  mistake. 
After  the  bank  had  been  in  operation  more  than  two  centuries, 
it  was  ordered  that  all  bills  of  exchange,  and  all  payments  in 
gross,  where  parties  had*not  otherwise  stipulated,  should  be  paid 
in  bank.  The  only  articles  to  be  exclusively  paid  for  in  bank 
funds  were  oil  and  quicksilver.  The  rule  that  bills  of  exchange, 
not  otherwise  expressed,  should  be  thus  paid  was  no  doubt  com 
plied  with,  because  both  convenience  and  interest  dictated  it ; 
but  as  cash  payments  for  merchandise  would  be  made  when  the 
contract  was  made,  the  payment  would  be  in  bank  or  other  funds, 
as  the  convenience  of  the  moment  might  suggest. 

It  was  a  great  mistake,  also,  to  state  "  that  derangements  in 
the  social  economy  of  the  state  soon  ensued ;  the  agio,  or  differ 
ence  between  the  current  money  and  transferable  amounts  at 
the  bank,  attained  to  thirty  per  cent."  The  impression  is  created 
here,  that  derangements  in  the  social  economy  were  caused  by 
the  peculiar  constitution  of  the  bank,  and  that  the  agio  of  thirty 
per  cent,  was  unfavorable  to  the  bank ;  neither  of  which  was 
the  case.  There  is  no  evidence  extant  that  the  Bank  of  Venice 
ever  caused  any  derangements  of  the  social  economy.  The 
voice  of  the  best  authorities  is  all  the  other  way.  The  bank  was 
an  advantage  to  Venice  never  questioned  by  those  familiar  with 
its  usages.  The  agio,  instead  of  being  against  the  bank,  was  in 
its  favor ;  its  funds  rose  to  thirty  per  cent,  premium  over  the 
current  coins,  and  continued  to  fluctuate  near  this  high  rate, 
until  the  government,  by  decree,  limited  the  premium  to  twenty 
per  cent.,  at  which  it  continued  permanently  fixed  so  long  as  the 
bank  existed.  The  ground  of  this  agio  is  not  adequately  ex 
plained  by  any  one,  and  was  probably  inexplicable  to  the  ency 
clopaedist,  who  evidently  looked  upon  the  institution  with  no 
friendly  eye. 

The  unit  of  the  money  of  account  of  the  bank  was  the  ducat. 
A  gold  coin  of  that  name  had  long  enjoyed,  in  Venice,  an  ex 
emption  from  the  changes  so  frequent  then  in  coins,  and  had 
20 


306  THE    BANK    OF    VENICE. 

been  held  in  high  repute,  far  and  wide,  for  its  purity.  In  the 
money  of  account  formed  upon  that  coin  were  the  books  of  the 
bank  kept.  It  was  said,  by  some,  that  the  agio  arose  in  part 
from  the  superiority  of  Venetian  ducats  to  other  current  coins. 
But  as  it  was  perfectly  understood  that  no  coins  passed,  neither 
any  right  to  any,  on  a  transfer  in  the  bank,  it  is  impossible  to 
attribute  the  agio  to  any  such  consideration.  It  is  true,  how 
ever,  that  the  nuisance  of  multiplied  coinage  has  for  centuries 
been  exhibited  in  Italy  in  its  worst  aspect ;  and  the  evil  was 
aggravated  in  Venice  by  a  large  admixture  of  coins  which  her 
widely-spread  commerce  brought  from  all  the  world.  In  Italy, 
the  perplexity  caused  by  multiplicity  of  coins  and  moneys  of 
account,  as  already  noticed,  reached  an  alarming  extent  In 
the  same  city,  frequently,  there  existed  among  merchants  quite 
a  diversity  in  the  moneys  of  account.  It  required  a  person  spe 
cially  skilled  to  tell  the  value  or  price  of  the  various  coins  pass 
ing  in  trade,  expressed  frequently  in  different  moneys  of  account. 
In  some  instances,  special  moneys  of  account  were  appropriated 
to  special  coins,  or  special  commodities. 

Any  method  which  offered  an  escape  from  such  intricacies, 
from  employing  such  coins,  from  the  danger  of  taking  counter 
feits,  and  from  the  risk  of  keeping  money  on  hand  for  large  pay 
ments,  could  not  but  be  regarded  with  continued  favor.  Even 
at  this  day,  the  evils  of  an  over-multiplied  coinage  press  with 
great  severity  upon  the  people  of  Italy.  Large  quantities  of 
coins  lie,  like  bullion,  in  the  coffers  of  the  bankers  ;  and  when  it 
is  necessary  to  dispose  of  them  in  bulk,  a  close  and  tedious  in 
spection  becomes  necessary.  In  a  hundred  coins,  no  five  may 
be  found  alike.  This  mischief  existed  in  full  force  in  Venice, 
and  had  its  due  share,  no  doubt,  in  creating  the  agio.  It  is  far 
from  adequate,  however,  to  account  for  the  agio  of  thirty  per 
cent,  mentioned  above,  or  the  twenty  per  cent,  fixed  by  law, 
much  less  an  additional  agio,  to  be  mentioned  hereafter. 

To  comprehend  this  extraordinary  fact  of  a  credit  on  the 
books  of  a  bank,  with  no  money  in  its  vaults,  and  not  bound  to 
make  that  credit  good  in  later  times  even  by  the  payment  of 
the  interest,  or  to  redeem  it  in  any  way,  having  been  for  hundreds 


THE     BANK     OF     VENICE.  307 

of  years  at  a  high  premium  over  gold  and  silver,  we  need  only 
remember  that  these  credits  were  the  funds  in  which  debts  were 
chiefly  paid.  If  credits  had  been  convertible  at  will  into  the 
precious  metals,  the  agio  could  never  have  originated,  much  less 
attained  so  high  a  point ;  for  the  moment  the  holders  of  credits 
advanced  the  price,  specie,  if  a  legal  tender,  would  have  become 
the  medium  of  payment,  as  the  cheaper  medium.  In  a  commer 
cial  community  like  Venice,  as  elsewhere,  large  transactions 
were  nearly  all  done  upon  credit.  The  chief  use  for  money,  or 
bank  credits,  was  not  in  the  purchase  of  commodities,  but  in  the 
payment  of  debts  incurred  for  goods  purchased  upon  credit,  or 
on  time.  When  the  republic  decreed,  in  1423,  that  bills  of  ex 
change,  and  other  large  payments,  should  be  paid  in  bank,  unless 
the  parties  had  otherwise  stipulated,  it  introduced  the  usage  of 
making  nearly  all  payments  there,  because  parties  preferred 
receiving  payment  in  bank,  and  in  the  fund  in  which  they  had 
to  pay  their  debts.  There  was  then  probably  ten  times  more 
demand  for  bank  credits  than  for  coins,  which  were  only  required 
for  export,  for  the  retail  trade,  and  for  other  special  but  limited 
uses.  The  necessity  of  punctually  meeting  all  commercial  engage 
ments  was  not  less  in  Venice  than  in  New  York  or  Philadelphia. 
Failure  to  pay  was  ruin.  The  merchant  in  good  credit  might 
purchase  at  his  pleasure  upon  deferred  payments ;  but  the  day 
of'  payment  must  arrive,  and  with  it  the  unavoidable  necessity 
of  meeting  these  liabilities,  however  thoughtlessly  incurred.  To 
this  compulsion  no  resistance  could  be  offered ;  from  this  obli 
gation  of  mercantile  punctuality  there  could  be  no  escape, 
no  evasion.  Doubtless  merchants  in  those  days  pushed  their 
credit,  as  in  later  times,  and  found  days  of  payment  days  of 
struggle,  anxiety  and  difficulty,  as  merchants  do  now.  Bank 
credits,  by  the  law  of  the  land  and  their  own  arrangements, 
being  the  only  funds  in  which  these  constantly  maturing,  and 
constantly  pressing  debts,  could  be  paid,  were  in  a  demand  propor 
tioned  to  this  urgency.  If  the  same  mode  of  adjusting  debts 
were  resorted  to  now,  the  result  would  be,  that  inconvertible 
bank  credits  would  go  frequently  to  a  high  premium  over  gold 
and  silver.  If  any  one  doubt  this,  let  them  attempt  a  solution 


308  THE    BANK    OF    VENICE. 

of  the  question,  Why  is  it  that  our  gold  and  silver  coins,  and 
bank-notes  convertible  into  them,  remain  at  par,  having  no 
greater  purchasing  power  when  interest  is  at  two  or  three  per 
cent,  per  month,  than  when  it  is  at  half  per  cent.  ?  It  is  the 
demand  for  money  to  pay  debts  which  thus  advances  interest ; 
and  this  does  not  aifect  the  value  of  coins  or  bank-notes  in  cir 
culation,  because  they  are  not  available  in  the  large  payments 
of  commerce.  It  is  that  fund  which  circulates  in  our  banks  as 
•"  deposits,"  which  actually  attains  the  highest  rates  of  interest. 
This  is  the  fund  in  which  debts  are  paid,  and  the  daily  employ 
ment  of  this  fund  is  an  hundred-fold  the  extent  of  any  use  of 
bank-notes  or  coins.  It  is  upon  this  principle  that  we  explain 
the  agio  of  bank  credits  at  Venice  over  the  current  money. 

No  doubt  this  premium  created  surprise,  and  many,  perhaps, 
looked  upon  it  as  unjust ;  but  it  was  the  result  of  the  merchants' 
own  movements.  The  government  did  not  cause  it,  nor  did  the 
banks.  It  was,  therefore,  acquiesced  in  by  the  merchants  as  a  result 
of  their  own  acts  in  their  own  business.  The  government,  so  far 
from  producing,  attempted  to  limit  it  to  twenty  per  cent.,  an 
attempt  which  was  rendered  wholly  abortive  by  the  introduction 
of  a  sur  agio,  or  super-premium,  calculated  upon  the  agio  and 
the  original  sum  together.  This  additional  premium  ranged  at 
from  twenty  to  thirty  per  cent,  for  a  long  period,  and  exhibited 
in  its  fluctuations  partly  the  pressure  for  money  to  pay  debts, 
and  partly  the  current  value  of  the  coins  which  were  offered  in 
exchange  for  bank  credits. 

The  precautions  against  mistakes  and  frauds  enforced  by  the 
government  of  Venice  in  the  affairs  .of  the  bank,  far  exceed  any 
required  by  the  authorities  of  the  present  time,  jealous  as  they 
are  of  banks.  Not  only,  as  we  have  seen,  was  every  transfer 
made  in  the  presence  of  two  book-keepers,  who  were  required  to 
keep  separate  sets  of  books,  but  the  bank  was  shut  one  day  in 
each  week ;  and  four  times  in  a  year,  each  time  twenty  days. 
.This  was  to  balance  and  thoroughly  supervise  the  books.  During 
the  period  when  the  bank  was  thus  shut,  no  bill  payable  in  it 
matured,  or,  rather,  none  could  be  protested  until  six  days  after 
.the  opening,  six  days  being  the  grace  allowed  on  bills  in  Venice. 


THE     BANK    OF    VENICE.  309 

A  custom  obtained  among  merchants,  and  others,  of  writing-off 
or  transferring  bank  credits  in  blank  during  the  time  when  the 
bank  was  closed.  The  entries  intended  to  be  placed  on  the 
books  of  the  bank  at  the  opening  were  made  by  the  parties  upon 
books  mutually  exchanged,  or  left  in  the  hands  of  a  broker,  pro 
per  authority  being  given  to  make  the  entries,  and  the  arrange 
ment  was  completed,  except  the  formal  execution  on  the  books 
of  the  bank.  No  doubt  this  facility  was  confined  to  those  who 
entertained  for  each  other  great  mutual  confidence  ;  it  may  have 
led  to  many  transfers  of  the  same  sum  whilst  the  books  were 
closed,  and  thus  in  part  have  compensated  the  injury  to  business 
caused  by  shutting  the  bank. 

The  great  feature  of  the  Bank  of  Venice  —  that  which 
required  all  bills  of  exchange  payable  in  that  great  commercial 
city  to  be  paid  at  the  bank  —  appeared  at  first  blush  to  be  an 
arbitrary  requirement,  if  not  a  most  unjust  one.  It  was  giving 
a  forced  currency  to  the  bank  deposits,  consisting  merely  of 
debts  due  by  the  government.  It  was  soon  found,  however,  to 
work  so  well  in  practice,  that  it  brought  an  immense  accession  of 
business  to  the  city,  and  to  the  bank.  Bills  of  exchange  became 
of  increased  use  in  all  the  neighboring  commerce,  and  a  vast 
concentration  of  payments  took  place  at  Venice,  and  in  the 
bank.  This  increase  enlarged  the  capital  of  the  bank.  The 
money  brought  in  to  pay  bills  was  taken  by  the  government  as 
fast  as  it  was  received,  until  the  amount  of  the  deposit,  or  debt 
of  the  state,  was  adequate,  by  rapid  circulation,  to  the  current 
payments  of  commerce.  This  made  the  bank  a  great  clearing 
house,  or  place  of  adjustment,  for  merchants  of  many  countries. 
Venice  was  for  centuries  the  greatest  entrepot  of  commerce  in 
Europe,  if  not  in  the  world.  The  chief  payments  or  liquidations 
of  this  trade  were  effected  at  the  bank.  As  is  the  case  in  many 
great  commercial  cities  of  the  present  day,  payments  to  a  great 
amount  were  thus  effected  at  Venice  upon  transactions  which 
had  occurred  elsewhere.  It  was  found,  therefore,  then  as  now 
in  regard  to  London,  Paris,  Hamburg  and  New  York,  that  it  was 
convenient  and  of  advantage  to  have  funds  in  Venice.  The  pay 
ments  of  bills  required  daily  such  a  large  sum,  that  the  demand 


310  THE     BANK     OF    VENICE. 

for  funds  for  that  purpose  was  always  very  great ;  and  where 
everybody  wanted  funds,  everybody  sent  them. 

The  bank  became,  then,  a  place  of  liquidation  ;  merchants 
made  their  bills  payable  at  the  point  where  was  the  greatest 
concentration  of  means  to  pay  them,  and  where  it  was  most  for 
their  advantage  to  receive  payment.  Those  who  had  occasion 
for  gold  or  silver,  purchased  with  these  deposits  what  was  re 
quired  ;  and,  with  slight  exception,  for  more  than  four  hundred 
years  the  precious  metals  were  at  a  discount,  compared  with  the 
bank  funds  —  the  demand  for  that  which  would  pay  bills  of  ex 
change  being  greater  than  for  gold  or  silver  for  any  special 
use  to  which  they  could  be  applied.  The  great  mass  of  the  pur 
chases  of  commerce  were  made,  in  the  first  instance,  by  bills  of 
exchange ;  and  the  great  operation  of  payments  consisted  in 
liquidating  these  bills.  The  demand,  therefore,  for  the  deposits 
in  which  they  were  paid  was  as  incessaixt  as  the  movement  of 
commerce  itself.  These  bank  deposits  circulated  on  the  books 
of  the  bank,  therefore,  precisely  in  accordance  with  the  move 
ments  of  trade ;  and  the  customers  of  the  bank  thus  applied  these 
credits,  or  the  debts  due  to  them,  to  the  discharge  of  the  debts 
they  owed. 


CHAPTER    XIV. 

THE     BANK     OF     GENOA. 

The  House  of  St.  George,  or  Bank  of  Genoa  —  Contrast  of  the  financial  sys 
tems  of  Venice  and  Genoa —  Complications  of  Genoese  finance —  Security 
required  by  public  creditors  —  The  system  of  1302,  and  its  officers  —  Pri 
vate  bankers —  The  Sank  established  in  1407  —  Its  large  array  of  officers 
—  Deferred  dividends,  or  Moneta  di  Paghe  —  Famine  of  1539  —  Deposit 
system  —  Bank  bills  —  Price  of  shares —  Money  and  moneys  of  account  — 
Advantages  of  the  Bank  to  trade  —  Methods  and  processes  of  the  Bank  — 
M.  Gautier  and  M.  Coquelin  on  the  moneys  of  account  of  the  Bank —  Carlo 
Cuneo  on  the  moneys  of  Genoa 

THE  finances  of  Venice  and  Genoa  present  a  remarkable  and 
instructive  contrast.  The  public  loan  of  Venice,  which  gave 
origin  to  the  bank,  was  forced ;  but  the  whole  subsequent  history 
of  the  bank  and  the  public  credit  is  one  of  entire  confidence  on 
the  part  of  the  people,  and  admirable  prudence,  good  faith,  and 
forbearance,  on  the  part  of  the  government.  Venice  made  the 
public  debt  the  chief  currency,  or  medium  of  exchange,  in  all 
the  large  operations  of  trade ;  and  the  public  debt  was  wisely 
kept  at  that  amount  which  not  only  preserved  its  value,  but  fur 
nished  the  full  quantity  of  currency  required  for  trade,  with  the 
means  of  increasing  or  diminishing  the  amount,  according  to  the 
proper  demand.  This  mutual  confidence  and  prudent  manage 
ment  are  creditable  alike  to  the  financial  skill  and  intelligence  of 
all  concerned.  The  government  enjoyed  a  loan,  free  of  interest, 
equal  to  the  whole  capital  of  the  bank,  without  having  given  any 
special  guarantee,  or  any  evidence  of  the  debt,  except  an  inscrip 
tion  on  the  books  of  the  bank ;  the  people  enjoyed  a  currency, 
which  for  centuries  stood  at  a  high  premium  over  gold  and  silver. 
The  Bank  of  Venice,  and  its  public  finances,  commencing  in 

(311) 


312  IMPERIUM    IN    IMPERIO. 

violence,  soon  settled  into  a  simplicity  and  regularity  of  progress, 
and  freedom  from  undue  fluctuation,  of  which,  for  such  a  lon^ 

'  O 

period,  there  is  no  parallel. 

The  finances  of  Genoa,  commencing  with  the  13th  century, 
furnish  a  history  equally  remarkable,  and  perhaps  equally  in 
structive,  although  in  many  respects  in  striking  contrast.  The 
turbulence  of  the  nobles  of  Genoa  kept  the  state,  for  ages,  in  a 
condition  approaching  civil  war.  In  the  midst  of  these  violent 
intestine  commotions,  the  financial  system  of  Genoa  had  its 
origin  and  growth.  The  public  loans  were  the  spontaneous  offer 
ings  of  the  lenders,  who,  though  willing  to  lend,  exhibited  from 
the  first  no  confidence  in  the  mere  promises  or  credit  of  the  go 
vernment,  and  exacted  most  rigidly,  from  time  to  time,  the  utmost 
security  and  the  strongest  guarantees  the  government  could  give. 
This  policy  on  the  part  of  the  public  creditors  was  continued  for 
more  than  a  century,  until  the  Genoese  system  of  finance  became 
the  most  complicated,  and  in  many  other  respects  the  most  ex 
traordinary,  of  which  we  have  any  account.  These  public  credit 
ors  became  a  body  of  great  power  and  influence,  governed  by 
its  own  laws,  enjoying  its  own  magistrates,  privileges  and  rights, 
wholly  independent  of  the  state  —  in  fact,  a  financial  imperium 
in  imperio.  These  privileges  were  not  usurped,  but  were  the 
result  of  well-considered  concessions,  which  could  not  be  inter 
fered  with  by  the  government,  without  the  violation  of  many 
solemn  stipulations  and  oaths  of  office ;  and,  in  fact,  they  were 
respected  for  ages,  amidst  strifes  of  party,  internal  and  bloody 
dissensions  and  civil  wars,  occasional  foreign  domination  and 
mutations  of  government,  which  for  violence  and  rapidity  have 
never  been  exceeded.  In  the  midst  of  all  this  tumult  and  rage 
of  individual  contest  and  civil  war,  we  cannot  adopt  modern 
phraseology  and  say  that  the  public  credits  of  Genoa  stood  un 
shaken  and  unimpaired;  but  we  can  say  that  the  public  creditors 
of  Genoa  held  their  position  and  their  privileges  untouched  and 
perfect.  They  had  no  occasion  to  ask  or  look  to  the  government, 
in  these  troublous  times,  for  the  payment  of  interest.  They  had 
provided  against  that  necessity  when  they  lent  their  money. 
Every  loan  was  secured  by  the  special  assignment,  on  the  part 


ORGANIZATION    OF    PUBLIC    DEBT.  313 

of  the  government,  of  taxes,  customs,  or  other  revenue,  sufficient 
to  pay  the  interest.  This  transfer  was  generally. absolute,  and 
was  accepted  in  full  of  the  interest ;  so  that  the  creditors  did 
not  always  receive  a  regular  rate  of  interest,  but  a  dividend 
according  to  the  product  of  the  security  or  fund  assigned. 

A  complete  survey  and  reconstruction  of  the  Genoese  system 
of  finance  took  place  in  1302.  Various  departments  of  inquiry 
in  connection  with  it  were  in  succession  submitted  to  the  con 
sideration  of  different  committees,  or  commissions,  by  the  Coun 
cil  of  the  Ancients ;  reports  were  made,  a  long  deliberation  fol 
lowed,  arid  finally  a  law  or  decree  of  271  articles  was  adopted. 
We  mention  this  only  as  evidence  of  the  attention  bestowed  upon 
the  subject,  for  we  can  notice  very  few  of  the  details  of  this 
elaborate  system.1  The  public  creditors  were  chiefly  known  by 

1  The  organization  of  the  public  creditors,  if  they  can  strictly  be  called 
such  who  were  for  the  most  part  purchasers  of  the  public  income,  consisted 
in  part  of  the  following  officers  :  — 

1.  Four  VISITORS,  two  nobles  and  two  of  the  people,  over  thirty  years  of 
age,  and  holding  estates  of  not  less  than  300  lires,  and  not  in  debt  to  the 
state.     They  remained  in  office  six  months,  having,  before  assuming  the 
office,  sworn  faithfully  to  fulfil  its  duties.     They  had  the  aid  of  four  nota 
ries,  or  clerks.   It  was  their  duty  to  scrutinize  all  accounts  of  other  officers, 
to  require  them  to  account,  to  receive  their  oaths  of  office,  to  make  at  the 
end  of  the  year  a  report,  with  a  summary  of  the  year's  payments  and  bal 
ances.     All  their  documents  were  to  be  accompanied  by  their  seal  (the  face 
of  St.  Michael).     Every  other  public  officer  was  prohibited  from  hindering 
or  interfering  with  the  full  exercise  of  their  functions. 

2.  Two  persons,  called  CONSOLS,  had  charge  of  the  office  of  transfer,  who 
had  various  duties,  besides  those  of  seeing  to  the  proper  transfer  of  shares. 
To  these  were  added,  afterwards,  two  others  in  the  same  office,  who  were 
called  COMFORTERS  (Confortators),  to  whom  special  duties  were  assigned. 
In  1321,  four  others  were  assigned  to  this  office,  called  COUNCILLORS  ;  the 
whole  eight  constituting  the  Council  of  Transfer. 

3.  KEY-KEEPERS  (Clavigeri)  had  charge  of  the   treasury,  or  money  on 
hand,  and  made  all  payments  in  money.     Their  whole  proceedings  were 
subject  to  a  vigorous  supervision.  ... 

4.  The  JUDGE  (Del  Giudice  del  Capitolo),  who  had  jurisdiction  of  all 
questions  arising  under  the  collection  of  the  revenue  by  the  public  creditors. 
His  acts  and  decrees  were  of  public  validity,  and  all  other  courts  were 
obliged  to  acknowledge  their  force. 


314  OFFICERS     OF    PUBLIC    DEBT. 

the  appellation  of  COMPERE,  or  purchasers,  for  they  had  in  fact 
purchased  certain  revenues  of  the  government.  The  loans  were 
divided  into  shares  of  one  hundred  lires  each,1  a  few  only  not 
being  subject  to  that  subdivision,  being  probably  transferable, 
as  at  Venice,  in  sums  at  the  pleasure  of  the  holders. 

5.  The  VICARIO  was  a  judge  of  still  higher  authority,  having  criminal  as 
well  as  civil  jurisdiction,  in  matters  of  revenue,  taxes,  fines,  &c. 

G.  Another  Judge,  holding  a  special  office  (Giudice  de  Calleghe),  was 
required  to  be  selected  from  twenty  of  the  largest  foreign  creditors,  at  a 
special  meeting  held  for  that  purpose.  When  sitting  to  decide  questions 
to  be  submitted  to  him,  he  was  to  call  to  his  assistance  other  creditors,  who 
could  then  vote  with  him.  No  one  could  be  offered  as  security  for  a  debt, 
or  for  the  good  conduct  of  officers,  who  was  not  first  approved  by  this  Judge. 
The  nobles  were  not  received  as  security. 

7.  FARMERS  of  the  revenue  (Appaltatori).     An  extensive  system  of  sub 
letting  the  collection  of  the  taxes,  revenues,  customs,  &c.,  was  adopted. 
Much  of  the  business  of  the  judges  consisted  in  deciding  questions  in  refer 
ence  to  these  farmers,  and  in  enforcing  their  contracts.     The  rules  under 
which  they  acted,  and  which  they  were  sworn  to  keep,  were  very  stringent. 
They  were  required  to  make  a  payment  in  hand  at  the  time  of  their  con 
tract,  and  to  give  security  within  the  first  quarter  for  the  full  payment, 
either  by  an  order  upon  a  banker,   or  by  deposit  of  money  or  precious 
stones ;  and  having  undertaken  a  contract,  they  were  not  to  leave  the  hall 
until  they  had  completed  the  preliminaries.     They  could  not  sublet  their 
contracts  without  due  permission.     Their  payments  were  to  be  made  in 
money,  or  by  checks  upon  the  banker  who  had  previously  agreed  to  pay 
their  orders.     No  debtor  in  default,  no  member  of  the  Council  of  the  An 
cients,  and  no  Abbate  of  the  people,  could  become  a  Farmer  of  the  revenue. 
Every  Farmer  in  arrear  paid  five  per  cent,  per  month,  if  in  arrear ;  and  if 
it  passed  a  year,  that  rate  was  doubled. 

8.  PROTECTORS,  whose  duty  it  was  to  watch  that  all  the  laws,  regulations 
and  contracts  respecting  the  public  debt  and  revenue  were  duly  observed 
and  enforced.     It  is  a  prominent  feature  in  all  these  offices,  that  the  super 
vision  is  very  much  subdivided,  and  very  much  separated  from  the  execu 
tion  of  the  services,  the  faithful  performance  of  which  they  were  intended 
to  secure.     No  doubt  the  need  of  so  many  officers  was  increased  by  the  fact 
that  many  large  cities  and  territories  were  among  the  securities  which  the 
republic  had  assigned  to  the  creditors. 

1  The  lire  of  Italy  had  a  similar  origin  with  the  French  livre,  the  English 
pound  —  that  is,  a  weight.  The  term  is  still  used  in  Milan  and  Genoa. 
Coins  of  that  name  are  now  of  the  value  of  about  fourteen  cents  ;  but  what 
their  value  was  in  the  13th  century,  is  a  subject  of  research. 


PRIVATE     BANKERS     OF    GENOA.  815 

"We  might  greatly  prolong  the  sketch  given  in  the  note,  of  the 
offices  pertaining  to  the  public  finances  of  Genoa ;  but  it  would 
still  fail  of  placing  the  whole  system  before  the  reader.  In  addi 
tion  to  the  many  oaths  and  securities  required  of  the  officers  we 
have  named,  and  their  subordinates,  the  chief  officers  and  coun 
cillors  of  the  republic  were  required  to  take  an  oath  to  observe 
all  laws  and  contracts  touching  the  rights  of  the  public  creditors, 
and  that  they  would  in  no  manner,  directly  nor  indirectly,  inter 
fere  with  the  revenues  or  income  pledged  for  their  payment.  No 
doubt  this  vast  array  of  officers  connected  with  the  public  debt, 
and  with  salaries  depending  on  the  continuance  of  the  system, 
greatly  assisted  in  giving  it  strength  to  resist  the  shock  of  war 
ring  factions,  and  the  perils  of  revolution.  The  parties  con 
nected  with  this  system  were  strong  enough  to  be  feared  and 
courted  by  all  sides,  and  they  secured  immunity  in  all  circum 
stances  by  keeping  somewhat  aloof  from  public  affairs.  The 
public  creditors,  or  the  compere,  were,  however,  very  prompt, 
upon  occasions  of  great  public  emergency,  to  come  to  the  aid 
of  the  government  with  large  sums  of  money,  and  other  useful 
assistance. 

The  reader  will  be  further  impressed  with  the  complication 
and  minuteness  of  regulation  applied  in  Genoa  to  this  subject, 
when  he  learns  that  the  number  and  kind  of  books  to  be  kept  in 
these  offices  were  all  prescribed,  and  required  to  be  renewed 
every  year.  The  books  of  every  year,  as  soon  as  closed,  passed 
into  another  office,  out  of  the  hands  that  kept  them.  Yet,  in 
the  most  turbulent  population  of  the  Middle  Ages,  these  minute 
regulations  were  observed  for  centuries,  and  as  long  as  the 
republic  maintained  its  importance. 

There  were  private  bankers  of  two  kinds  in  Genoa  previous 
to,  and  after  the  establishment  of  the  Bank  of  St.  George.  One 
kind  confined  their  business  mainly  to  transactions  connected 
with  the  public  revenue  and  finance,  and  to  dealing  with  public 
officers.  The  other  carried  on  such  general  banking  business  as 
receiving  money  on  deposit,  changing  money,  lending  money,  &c. 
These  were  placed,  by  law,  under  very  strict  regulations.  They 
were  required  to  take  an  oath  to  fulfil  faithfully  the  duties  of 


31G  THE    ORIGIN    OF    THE    BANK. 

their  profession.  They  were  sworn  not  to  abrade  or  clip  coins, 
directly  nor  indirectly,  nor  to  keep  young  persons  in,  nor  allow 
hangers-on  about,  the  bank ;  to  write  down  immediately  all 
money  deposited  with  them,  by  whom,  and  to  whom  and  at  what 
time  payable ;  to  refuse  to  exchange  false  money,  and  to  inform 
upon  all  persons  offering  suspected  coins.  They  were  to  make 
known  whether  the  bank  was  the  property  of  one  or  many,  and 
if  there  were  partners,  to  make  their  names  known  at  the  office 
of  a  Tribunal  of  Commerce,  before  which  they  were  to  enter  into 
obligations  to  comply  with  the  law  of  banking,  and  pay  all  penal 
ties.  The  name  of  each  partner  was  to  be  posted  up  in  the 
bank,  and  the  amount  of  his  interest. 

Early  in  the  15th  century,  murmurs  arose  among  the  people 
of  Genoa  in  regard  to  the  financial  position  of  the  country. 
After  several  years'  complaint,  a  commission,  or  committee  of 
eight  were  appointed,  in  the  year  1407,  to  report  a  plan  of  re 
form.  The  commissioners  were  men  who  enjoyed  the  confidence 
of  all  parties.  They  found  various  bodies  of  compere,  or  public 
creditors,  each  holding  their  own  securities,  and  making  altoge 
ther  an  injurious  complication.  The  commissioners,  after  con 
sulting  with  the  classes  concerned,  determined  upon  paying  off 
the  whole  public  debt,  and  a  resumption  of  all  grants  and  secu 
rities.  To  effect  this,  they  proposed  to  issue  shares  of  100  lires 
each,  in  sufficient  amount  to  pay  off  the  whole,  so  far  as  the 
holders  could  receive  payment.  To  the  shares  thus  issued  were 
added  some  banking  privileges,  and  they  were  to  be  secured  by 
the  reassignment,  on  the  part  of  the  republic,  of  such  part  of  the 
customs,  revenues,  taxes  and  property  before  held  by  the  com 
pere,  as  were  deemed  adequate,  to  be  enjoyed  by  the  House  of 
St.  George  upon  the  same  terms  and  privileges,  and  with  the 
same  rights  and  remedies,  which  accompanied  them  in  the  hands 
of  the  compere.  The  number  of  shares  to  be  issued  were  4767. 

The  Bank  of  St.  George  was  established  in  pursuance  of  the 
recommendations  of  the  commission,  a  further  loan  was  effected 
by  the  republic,  and  the  measure  appeared  to  find  full  favor 
with  the  people.  The  government  had,  by  this  measure,  suc 
ceeded  in  reducing  the  interest  payable  upon  the  public  debt  to 


OFFICERS    OF    THE    BANK.  317 

seven  per  cent. ;  any  overplus  collected  from  the  revenues 
assigned,  were  payable  to  a  sinking  fund  (Code  di  Redenzione). 
The  creditors  had  previously  realized  nearly  eight  per  cent. 

The  Bank  of  St.  George  was  as  watchful  of  its  special  interests 
as  its  predecessors,  the  compere :  besides  the  general  provisions 
by  which  it  enjoyed  largely  their  ancient  powers  and  privileges, 
it  obtained  not  less  than  nine  further  concessions  during  the  first 
century  of  its  history,  and  among  these  a  most  distinct  and  full 
exemption  of  bank  shares  and  deposits,  from  all  attachment  and 
confiscation  for  any  public  or  private  claims,  upon  any  pretence 
whatever.  The  organization  or  government  of  the  bank  became 
complicated  to  a  degree  even  far  exceeding  that  of  the  compere.1 

1  The  government  of  the  Bank  consisted  — 

1.  Of  a  General  Council  of  480  members,  over  eighteen  years  of  age,  and 
holders  of  not  less  than  10  shares. 

2.  Eight  Protectors,  six  of  whom  over  thirty,  and  two  over  twenty-five 
years  of  age,  holders  of  100  shares. 

3.  Thirty-two  Electors,  who  were  to  select  the  Protectors. 

4.  Four  Proveditors,  who  had  served  as  Protectors. 

5.  Eight  Procurators,  six  of  whom  over  thirty,  and  two  over  twenty-five 
years  of  age,  and  holders  of  40  shares. 

6.  The  Council  of  1444,  so  called  from  the  year  in  which  it  was  insti 
tuted.     It  consisted  of  eight  members,  qualified  as  the  Procurators. 

7.  Eight  Councillors  of  the  Salt  Impost,  with  the  same  qualifications. 

8.  Four  Sindicators,  holders  of  40  shares;  two  of  these  to  be  twenty-five, 
the  others  to  be  over  twenty-two  years  of  age. 

9.  The  Treasurer-general.     lie  was  elected  by  the  Protectors  and  the 
Council  of  1444.     He  gave  security  to  the  amount  of  90,000  lires,  besides 
a  deposit  of  160.     His  salary,  at  first  1660  lires,  was  finally  advanced  to 
3256,  an  increased  deposit  being  required.     He  held  his  office  five  years, 
subject  to  annual  confirmation.    He  was  to  be  over  thirty  years  of  age,  and 
not  allowed  to  be  engaged  in  any  other  business,  public  or  private.     He 
was  to  have  no  interest  in  any  bank,  or  any  concern  of  bankers,  or  other 
persons  dealing  in  money.     He  could  not  be  a  stockholder  in  St.  George, 
nor  have  an  account  current  with  any  officer  of  the  same.   lie  was  required 
to  be  in  his  office  with  his  weigher  every  morning  and  afternoon,  to  receive 
and  pay.     He  could  only  receive  and  pay  the  coins  specified  as  taken  by 
the  bank,  namely,  from  the  mints  of  Genoa,  Spain,  Venice,  Florence,  arid 
Naples,  of  the  weight  and  at  the  price  fixed  by  the  Protectors:  other  money 
was  taken  by  the  government  tariff.     Biglietti,  for  dividends,  were  payable 
in  scudi,  at  4.10  lires.     Cartulario,  or  bills  for  deposit,  were  payable  in  the 


318  DEFERRED     DIVIDENDS. 

The  rage  for  system  and  regulation  was  carried  so  far,  that 
when,  upon  an  extraordinary  public  emergency,  the  bank  made 
a  great  effort  to  assist  the  republic  with  money,  it  resolved  to 
pass  three  annual  payments  of  interest :  very  little  was  left  for 
the  future  in  the  arrangement  of  the  business.  The  three  years' 
interest  were  each  postponed  three  years,  the  first  year  omitted 
being  payable  on  the  fourth  year,  the  second  on  the  fifth,  and 
the  third  on  the  sixth.  A  new  account  for  these  deferred  divi 
dends  was  opened  with  the  shareholders,  and  they  were  duly 
credited  with  each  dividend  payable  at  the  time  fixed.  These 
past  dividends  soon  became  as  saleable  as  the  shares  of  the  bank, 
the  interest  being  deducted  according  to  the  time  they  had  to 
run  to  maturity.  In  this  way  the  bank  received  them  for  all 
taxes  and  dues,  and  the  shareholders  suffered  only  the  loss  of 
the  interest  on  their  dividends,  but  enjoyed  the  advantage  of 
a  credit  for  three  years'  income,  which,  if  need  required,  they 
could  turn  into  money  at  only  the  discount  of  current  interest 
Upon  the  occasion  of  this  measure,  the  ecclesiastical  shareholders 
alone  hesitated  to  give  their  consent :  they  could  not,  being,  we 


same  coin  which  had  been  received.  All  false  money  was  to  be  cut.  The 
treasury  was  never  to  be  without  the  sum  of  24,000  lires.  The  Treasurer 
kept  one  of  the  three  keys  of  the  treasury,  the  Prior  another,  and  the  Sin- 
daco  of  the  Compere  the  third. 

All  these  officials  were  elected  in  modes  specially  set  forth,  each  class  by 
some  particular  combination  of  the  others  held  for  that  purpose.  The 
duties  of  each  class  were  designated,  and  special  oaths  and  securities  were 
exacted.  Besides  the  above,  were  a  host  of  subaltern  officers,  of  greater  or 
less  importance,  such  as  Revisors,  Fiscal  Advocates,  Judges,  Chancellors, 
Consultors,  &c.,  to  all  of  whom  special  duties  were  assigned. 

Oaths,  numerous  and  solemn,  were  a  prominent  feature  in  the  govern 
ment  of  the  bank.  They  were  made  upon  "  the  Holy  E\7angelists  (Sacro- 
santi  Evangelj),"  and  after  minutely  enumerating  the  obligations  under 
taken,  ended  with,  "  So  help  me  God,  and  these  Holy  Gospels  (Cosi  m'ajuti 
e  questi  santi  Evangel])."  There  were  not  only  general  oaths  of  office,  but 
special  oaths  for  special  duties,  as  they  occurred.  Some  of  these  oaths 
bound  the  officers  to  the  strictest  silence,  in  reference  to  the  affairs  of  the 
bank  ;  and  in  some  cases  they  were  sworn  not  to  make  remarks,  nor  utter 
doubts,  nor  in  any  other  way- to  convey  anything,  from  which  conclusions 
could  be  drawn  respecting  the  business  of  the  bank. 


THE    FAMINE    OF    1839.  319 

may  suppose,  for  the  most  part  in  the  position  of  trustees,  give 
their  assent  without  wounding  their  consciences  ;]  and  applica 
tion  was  made  by  the  bank  to  Pope  Calistus  III.,  who  kindly 
authorized  the  measure,  accorded  the  delay  asked  for  by  the 
bank,  and  saved  the  consciences  of  the  hesitating. 

This  system  of  deferring  dividends  for  three  years,  but  giving 
credit  for  them  in  advance,  was  repeated  afterwards ;  and  again, 
for  the  sake  of  the  ecclesiastics,  the  aid  of  the  Pope  was  invoked 
with  success,  as  appears  by  a  Bull  of  Sixtus  IV.,  in  1479.  Owing 
to  special  facilities  offered  by  the  bank,  these  deferred  dividends 
standing  on  the  books  to  the  credit  of  shareholders  became  the 
subject  of  great  traffic.  They  were  much  used  as  a  means  of 
purchase  and  payment,  under  the  name  of  Paghe  Scritti,  or  Lire 
di  Paghe,  for  which  there  was  always  a  current  price,  which,  in 
fact,  constituted  a  separate  money  of  account  in  Genoa.  They 
were  received  in  the  bank,  upon  terms  declared  in  advance  every 
year,  us  a  collateral  for  money  advanced,  generally  at  the  rate 
of  seventy-five  per  cent,  of  their  nominal  rate-. 

In  the  year  1539  a  severe  famine  occurred,  which  compelled 
the  government  to  avail  itself  largely  of  the  aid  of  the  House  of 
St.  George,  as  it  became  necessary  to  commence  and  prosecute 
several  public  works,  for  the  purpose  of  employing,  and  in  that 
way  feeding,  the  poor.  The  advances  made  by  the  bank  resulted 
in  a  new  contract2  with  the  republic,  by  which  the  most  of  the 
taxes  and  customs  pledged  to  the  bank  were  conveyed  to  it  in 
full  property.  The  arrangement  was  satisfactory  to  both  par 
ties,  and  was  specially  helpful  to  the  bank,  by  giving  increased 
confidence  in  its  shares,  and  wider  credit  to  the  institution.  The 
ancient  privileges  were  not  only  retained,  but  enlarged.  No  new 
taxes  could  be  imposed,  affecting  those  assigned  to  the  bank, 
without  its  consent.  The  Doge,  the  Governors,  and  their  suc 
cessors,  were  required  every  year,  at  the  instance  of  the  officers 
of  the  bank,  to  swear  upon  the  Holy  Evangelists  to  observe  all 

1  "Erano  participi  nellc  compere  molti  Ecclesiastic!  e  Corporazione  reli 
giose,  ne  potevansi  prendere  deliberazione  in  proposito  senza  timore  di  gra- 
vare  le  coscienze." — Carlo  Cuneo,  p.  119. 

2  Magno  Contralto  di  Consolidazion. 


320  CHANGE    IN    GENOESE    BANKING. 

the  covenants  and  stipulations  contained  in  the  new  contract, 
the  bank  paying  into  the  public  treasury,  every  year,  50,000 
lires. 

Whatever  may  have  been  the  precise  functions  of  the  House 
of  St.  George  as  a  bank,  previous  to  the  year  1673,  a  great 
change  was  made  at  that  time.  Its  shares  had,  before  then, 
been  largely  and  freely  employed  in  purchases  and  payments. 
It  had  received  deposits,  and  issued  bills  for  them  in  sums  to 
suit  the  depositor ;  and  these  bills  had  circulated  with  great 
acceptance  as  a  substitute  for  money.  The  bank  had  not,  how 
ever,  become  a  great  commercial  agent.  In  the  year  1673,  after 
a  period  of  tranquillity  and  commercial  activity,  the  city  was 
found  to  be  overflowing  with  the  diverse  coinage  of  Europe, 
Asia  and  Africa ;  the  inconvenience  became  so  pressing,  as  to 
require  a  remedy.  The  government  of  the  bank  'therefore  applied 
to  the  republic  for  an  enlargement  of  its  powers  and  privileges. 
The  application  was  successful ;  and,  after  the  example  of  Venice 
and  Amsterdam,  bills  of  exchange  of  any  amount,  payable  in 
Genoa,  were  made  payable  at  the  bank,  with  all  other  debts  over 
100  lires.  This  concession  to  the  bank  was  fortified  and  enforced 
by  heavy  penalties.  The  circulation  of  the  shares,  and  of  the 
bills  of  the  bank  was,  by  this  new  regulation,  freed  from  many 
formalities  and  delays  previously  encountered.  The  presence 
of  a  notary  was  no  longer  necessary  at  a  transfer  of  shares  or 
deposits,  and  the  bills  were  circulated  simply  by  endorsement. 

The  transfers  of  shares  and  deposits  soon  fell  into  the  simple 
and  eas^  process  observed  at  Venice.  The  bills,  however,  were 
a  feature  of  banking  peculiar  to  the  House  of  St.  George.  They 
were  not  issued  in  small  amounts,  nor  in  special  denominations, 
but  in  the  handwriting  of  the  officers  of  the  bank,  and  in  sums 
requested  by  the  depositors,  or  persons  applying.  The  business 
of  the  bank  enlarged  so  rapidly  under  this  policy,  that,  as  some 
writers  express  it,  four  banks  of  the  same  kind  had  to  be  esta 
blished  to  meet  the  demands  of  trade.  This  was  merely  a  divi 
sion  of  the  customers  of  the  bank,  by  the  alphabet,  into  four  por 
tions,  each  of  which  was  provided  with  a  separate  organization 
of  officers,  clerks,  books,  &c. ;  so  that  each  of  these  departments 


FINANCIAL    SAGACITY    OF    GENOA.  321 

was  independent  of  the  other,  though  all  were  integral  parts  of 
the  same  institution.  The  bank  soon  became  -widely  and  favor 
ably  known ;  its  possession  of  immense  revenues  caused  it  to  be 
regarded  as  one  of  the  richest  institutions  in  the  world.  This, 
no  doubt,  increased  for  a  time  its  commercial  power  and  use 
fulness.1 

Some  of  the  modes  of  transacting  business  in  the  bank 
strongly  illustrate  the  financial  caution  and  skill  of  the  Genoese 
people.  Each  of  the  four  departments  of  the  bank  in  which  de 
posits  were  received,  was  attended  by  two  notaries,  or  clerks, 
one  of  whom  credited  the  depositor,  and  the  other  charged  the 
treasurer,  or  cashier,  with  the  sum  received ;  the  treasurer  en 
tered  the  amount  in  the  depositor's  bank-book,  or  manual.  Here 
were  three  checks  upon  the  amount  of  each  deposit.  It  was  not 
in  the  power  of  the  two  receiving  clerks,  or  notaries,  to  charge 
the  treasurer  with  more  money  than  was  received,  nor  was  it  in 
their  power  to  give  the  depositor  credit  for  more  or  less  than  was 
received.  There  were  separate  books  for  the  entry  of  receipts  of 
gold,  and  of  silver.  There  were  three  separate  treasuries  :  one 
for  deposits  of  coin,  which  were  to  be  returned,  on  demand,  in 
the  very  kind  deposited ;  one  for  a  general  depository  of  gold 
and  silver  coins  at  rates  fixed  by  the  bank ;  and  another  for 
current  coins,  at  the  rates  named  in  the  annual  table  of  rates 
published  by  the  government. 

The  shares  into  which  the  public  debt,  as  held  by  the  bank, 
was  divided,  were  called  "luoghi"  (places),  being  for  100  lires 
each.  They  were  transferable  verbally,  in  the  presence  of  a 
notary  of  the  bank,  by  writing,  by  will,  or  by  mortgage.  These 
shares  circulated  freely  and  extensively  in  commerce,  both  in 
purchase  and  in  payment.  They  attained  a  value  far  above  par, 

1  The  power  of  the  bank  no  doubt  created  apprehensions,  which  some 
times  found  expression,  in  despite  of  its  repressive  influence.  Foglietta,  an 
historian  of  Genoa,  says  that  this  bank  "  became  a  body  of  the  richest  citi 
zens  —  a  republic  more  potent  and  terrible  than  its  mother.  It  began  to 
be  feared  that  the  bank  would  swallow  the  republic;  that  is,  that  the 
republic  would  reappear  as  a  bank,  after  having  been  swallowed  as  a 
republic."  —  Economisti  Italiani,  Parte  Moderna,  vol.  viii.,  p.  360. 
21 


322  DIFFICULTY    OF    THIS    SUBJECT. 

and  held  it  for  a  period  of  more  than  two  centuries.  In  an 
elaborate  table,1  taken  from  the  books  of  the  bank,  by  Carlo 
Cuneo,  the  rate  of  the  dividends  is  given  from  the  year  1409  to 
1800,  and  the  price  of  the  shares,  from  the  year  1559  down  to 
the  same  year.  The  shares  were  at  48,  in  1559 ;  in  1582,  at 
112;  in  1606,  at  219;  in  1621,  at  278.  This  advance  was 
attended  with  many  and  wide  fluctuations :  the  rate  continued 
to  vary  between  140  and  200  down  to  1739,  after  which  the 
quotations  are  in  scudi  of  4  lires  4.  In  1740,  the  quotation  is 
30  scudi,  which  is  still  over  25  per  cent,  above  par :  the  rate 
fluctuates,  down  to  1797,  between  20  and  34  scudi;  in  1798, 
it  is  at  8,  and  in  1800,  at  4.  The  same  table  furnishes  the  price 
of  the  deferred  dividends  (valute  delle  paghe)  from  1559  to 
1764.  They  are  singularly  free  from  fluctuation.  Being  much 
employed  as  a  currency,  this  steadiness  of  value  must  have 
been  a  great  recommendation. 

The  money  of  Genoa,  during  the  period  in  which  the  bank 
flourished,  although  understood  practically  by  those  who  were 
immediately  conversant  with  it,  was  a  mystery  which  writers 
of  history  did  not  penetrate.  The  only  reliable  account  of  it 
now  is  in  the  works  upon  exchange,  book-keeping,  upon  the  value 
of  coins,  such  as  merchants'  guide-books,  bankers'  assistants  — 
works  not  rare  then,  in  various  forms,  from  heavy  folios  and 
quartos  to  light  books  for  the  hand.  When  the  history  of  money 
is  properly  written,  these  books  must  furnish  the  materials.  The 
occasional  references  to  this  subject  by  historians  are,  for  the 
most  part,  wholly  unsafe.  Such  a  system  of  moneys  of  account, 
coins  and  currencies  as  existed  at  Genoa  could  never  be  under 
stood  without  special  initiation  even  by  contemporaries,  much 
less  by  those  who  look  back  at  it  from  the  distance  of  half  a 
century.  It  would  require  far  more  space  than  we  can  give  to 
attempt  an  exposition  of  the  subject,  and  far  more  figures  than 
the  reader  would  care  to  look  at.  Such  an  examination  would 

1  This  table  may  be  found  at  pages  307  to  311  of  "Debito  Pubblico  di 
Genova."  The  abstract  was  made,  the  author  modestly  intimates,  "  non 
senza  fatica." 


THE    BANK    SHAKES.  323 

not,  however,  be  without  its  profit  to  the  real  student  of  the 
theory  and  usages  of  the  money  system. 

The  currencies  of  Genoa  were  of  several  kinds :  — 

1.  The  bank  shares,  consisting  each  of  100  lires  of  the  public 
debt,  as  held  by  the  bank.     It  was,  in  fact,  by  the  constitution 
of  the  bank,  rendered  a  bank  stock.    This  circulated  with  almost 
as   much  facility  as  a  bank  deposit.     It  became  the  foundation 
of  a  separate  money  of  account,  in  which  the  value  of  the  bank 
shares  were  ever  after  expressed.     This  money  of  account  be 
came  fixed  at  the  point  when  the  shares  had  risen  to  a  rate 
about  twenty-five  per  cent,  above  par.    Bank  money  (valute  banco) 
was  then  always  rated  at  about  twenty-five  per  cent,  above  the 
common  currency.     The  bank  shares  went  up,  subsequently,  to 
nearly  three  hundred  per   cent,  above  nominal  par,  and  were 
quoted    accordingly ;   but   the   money  of  account  called  bank 
money  never  varied.     It  became  a  reliable  register  of  the  values 
to  which,  by  the  custom  of  merchants,  it  was  applied.     It  was 
as  readily  used  to  express  the  value  of  coins,  and  other  cur 
rencies,  as  it  was  to  state  the  value  of  the  bank  shares.     The 
bank  also  issued  bills  in  the  denominations  of  this  money  of 
account,  which  served  as  a  currency  of  the  same  nature  as  the 
shares,  but  current  out  of  the  bank  by  means  of  these  bills.     It 
is  probable  they  were  issued  upon  the  hypothecation  of  shares, 
which  were  redeemable  upon  the  return  of  the  bills.    These  were 
used  to  some  extent  in  the  early  history  of  the  House  of  St. 
George,  but  were  less  used  when  the  business  of  the  bank  was 
enlarged;   and  deposits,  with  bills  issued  for  them,  came  into 
use  as  a  currency. 

2.  The  bank  deposits  being  transferable  with  facility,  were 
employed  largely  as  a  currency  in  the  chief  transactions  of  busi 
ness.     The  bank  bills  issued  for  deposits  were  also  used  exten 
sively  as  a  currency,  but  to  what  extent,  as  compared  with  the 
deposits,  we  are  not  informed.     These  deposits  and  bills  repre 
sented  coins  of  full  weight  and  value,  and  were  payable  on  de 
mand  in  such  coins.     The  coins  themselves  were  not  a  currency, 
but  an  article  of  merchandise.     The  madonines  of  Genoa  were 
probably  the  only  coins  taken  by  their  face,  without  weighing 


324  DEFERRED    DIVIDENDS. 

and  assaying ;  but  they  were  subject  to  fluctuation  in  the  mar 
ket,  and  those  who  needed  them  were  obliged  to  pay  the  current 
price.  Coins  of  gold  and  silver,  from  the  mints  of  Genoa,  and 
coins  of  gold,  from  the  mints  of  Spain,  Venice,  Florence,  and 
Naples,  were  taken  on  deposit  at  a  rate  fixed  by  the  protectors 
(officers)  of  the  bank ;  and  other  coins  at  the  rate  fixed  by  the 
tariff  of  the  government.  All  these  were  convertible  into  cur 
rency  by  being  deposited  at  the  rates  fixed  by  the  bank.  A 
money  of  account  was  formed  upon  these  deposits,  in  which  their 
value  or  price  was  regularly  expressed :  it  remained  constant, 
whatever  fluctuations  occurred  in  coins  or  bullion.  This  money 
of  account,  called  moneta  di  permessi,  expressed  in  lires,  with 
that  prefix,  denoted  a  value  of  the  lire  about  fifteen  per  cent, 
above  ordinary  currency.  The  duties  payable  at  the  custom 
house,  and  other  public  revenues  of  the  bank,  were  all  estimated 
in  this  money  of  account ;  and  the  books  pertaining  to  them, 
and  the  money  in  the  treasury  of  the  bank,  were  kept  in  it. 

3.  Another  currency  of  Genoa  was  the  deferred  dividends  of 
the  bank.  A  credit  for  these  dividends  was  regularly  entered 
to  each  shareholder  for  three  years'  dividends  on  each  share. 
The  par  of  these  credits  was  21  lires  for  each  share.  This  was 
subject  not  only  to  the  discount  of  interest,  but  to  such  further 
discount  as  the  course  of  the  market  might  impose.  The  market 
value,  subject  to  variation  of  interest  according  to  time  of  pay 
ment,  in  1559,  was  14  lires  4s.  In  the  course  of  a  century  they 
rose  to  17  lires.  They  stood  subsequently,  for  a  century,  at  18 
lires.  Upon  these,  as  we  have  already  said,  a  money  of  account 
was  formed  which  expressed,  in  lires  di  paghe,  the  varying  value 
of  these  credits  according  to  the  time  they  were  payable,  and 
the  state  of  the  demand  for  them.  They  were  receivable  by  the 
bank  for  all  demands,  at  a  rate  fixed  every  year,  with  deduction 
of  interest  according  to  time.  The  people  of  Genoa  well  under 
stood  what  was  meant,  when  moneta  di  paghi  was  spoken  of; 
and  this  currency  was  as  acceptable  as  any  other,  because  it  was 
taken  by  the  bank  not  only  in  payment,  but  as  a  security,  ad 
vances  at  the  rate  of  seventy-five  per  cent,  being  made  upon  it 
at  all  times.  The  bank  could  always  regard  it  as  a  favorite  cur- 


THE    COMMON    CIRCULATION.  325 

rcncy,  because  it  was  a  debt  of  the  bank ;  and  receiving  it  was 
extinguishing  a  debt  in  advance  at  a  fair  rate  of  discount.  Lires 
di  paghe  were  always  above  par  in  the  common  currency. 

4.  The  common  currency  of  Genoa,  in  which  retail  business 
and  many  other  transactions  were  carried  on,  were  the  usual 
circulating  coins  of  gold  and  silver,  a  large  portion  of  which 
were  much  worn  by  use,  or  which  had  suffered  from  paring,  plug 
ging,  sweating,  and  other  modes  of  abstracting  from  the  value 
of  coins.  This  money  had  also  its  separate  money  of  account, 
called  fuori  banco,  or  out-of-bank  money.  The  coins  to  which 
it  referred  were  in  all  states  of  deterioration,  though  taken  for  a 
time,  even  after  they  had  lost  a  part  of  their  weight,  at  their 
nominal  value.  The  money  of  account  which  supervened  upon 
the  use  of  these  abused  coins,  took  a  lower  standard  for  the  lire 
than  the  other  currencies.  It  became,  however,  a  real,  though 
less  permanent  money  of  account.  In  it  the  prices  of  retail 
trade  were  expressed,  and  generally  all  the  common  transactions 
of  life  not  connected  with  the  larger  movements  of  trade,  or  with 
the  bank.  It  was  the  ordinary  money  of  account :  when  the 
others  were  used,  their  specific  name  was  frequently  mentioned ; 
and  people  were  generally  supposed  to  express  amounts  in  fuori 
banco,  unless  there  was  something  to  show  the  contrary.  It  in 
no  way  appeared  on  the  books  of  the  bank,  though  no  doubt  the 
books  of  account  of  the  distributing  merchants,  tradesmen,  and 
shopkeepers,  were  wholly  kept  in  it.  In  their  books  all  other 
currencies  were  reduced  to  this  money  of  account. 

The  advantage  of  the  bank  to  the  commercial  community  in 
which  it  was  situated  was  very  much  the  same  which  we  have 
already  specified  in  regard  to  the  Banks  of  Amsterdam,  Ham 
burg,  and  Venice.  We  need  not  repeat  the  benefits  of  avoiding 
hazards  and  troubles  in  making  the  large  payments  of  com 
merce  in  coin,  nor  refer  again  to  the  rapid  circulation  attained 
by  transferring  the  ownership  of  coins,  instead  of  the  coins 
themselves,  in  the  payments  of  trade.  We  need  not  even  advert 
at  length  to  the  lesson  taught  by  this  mode  of  payment,  that  it 
is  not  essential  to  a  payment  that  coins  or  bullion  should  be 
seen,  handled  or  touched,  to  make  effective  payments ;  and  that, 


326  THE    GENOESE    BANK    BILLS. 

therefore,  neither  coins  nor  bullion  are  of  the  essence  of  a  pay 
ment  ;  and  that,  however  necessary  it  is  that  payments  should 
be  complete,  satisfactory  and  irreversible,  yet  these  requisites 
are  all  fully  attainable  without  actually  employing  the  precious 
metals  in  any  shape ;  and  that,,  in  fact,  abundant  employment 
can  always  be  found  for  the  precious  metals,  when  every  device 
to  avoid  their  use  in  commerce  is  exhausted. 

The  Bank  of  Venice  made  one  important  step  in  advance 
of  its  contemporaries :  it  circulated  the  ownership  of  a  claim 
upon  the  government,  or  of  coins  on  deposit ;  the  Bank  of  Genoa 
not  only  circulated  both,  but  first  resorted  to  the  use  of  bank 
bills.  This  was  not  done,  it  is  true,,  in  the  improved  and  conve 
nient  forms  now  in  use  ;  they  were  not  issued  in  denominations 
of  thousands,  hundreds,  fifties  and  fives,  but  merely  in  such  sums 
as  were  required  by  those  who  took  them.  They  were,  besides,, 
only  negotiated  or  passed  by  endorsement ;  yet,  with  all  this,  it 
was  a  long  step  in  advance,  and  furnished  to  the  commercial 
community  a  most  effective  instrument  of  payment.  We  are  well 
informed  that  the  bills  issued  by  the  bank  were  much  employed^ 
but  cannot  now  ascertain  whether  they  were  issued  in  small 
sums.  We  believe  they  were  chiefly  employed  in  large  transac 
tions.  A  deposit  of  gold  or  silver  entitled  the  depositor  to  a 
hank-note,  or  notes,  for  the  sum ;  the  holders  of  shares  in  the 
bank  were  also  entitled  to  bills,  upon  some  terms  not  fully  ex 
plained,  but  probably  constituting  a  form  of  circulating  the 
shares  out  of  the  bank,  which  were  otherwise  only  transferable 
in  the  bank.  Bills  were  issued  upon  the  deferred  dividends, 
reduced  to  their  value.  These  several  forms  of  bills  performed 
large  service  as  currency,  in  connection  with  the  bank  shares,, 
and  the  deposits  in  the  bank.  All  these  were  at  a  large  pre 
mium  over  the  remaining  circulation  of  coins  called  fuori  banco- 
money. 

If  the  payments  of  a  great  commercial  city  like  Genoa  had 
been  made  in  coins,  there  could  have  been  no  escape  from  the 
use  of  mules  and  carriers,  with  an  army  of  expert  tellers.  Various 
plans  of  avoiding  the  risk,  trouble,  delay  and  expense  thus  en 
countered,  had  at  different  periods  been  adopted :  this  of  bank 


OFFICE    OF    BANK    BILLS.  327 

bills  was  first  resorted  to  in  this  instance,  and  with  such  success, 
as  to  afford  great  satisfaction.  It  was  found  to  be  a  rapid,  safe 
and  efficient  means  of  payment.  The  principle  upon  which  this 
proceeded  was  soon  understood ;  it  was  not  essentially  different 
from  that  which  governed  other  modes  of  payment.  Amounts 
payable  and  receivable  could  only  legally  be  discharged  in  coins, 
or  other  legal  currency;  but  debtors  are  only  anxious  to  be 
acquitted  of  their  obligations  in  any  manner  that  shall  be  effec 
tual,  satisfactory  and  creditable.  They  do  not  necessarily  ask 
or  exact  payment  in  coins ;  they  are  content  to  receive  what 
they  find  others  are  willing  to  take.  In  Genoa,  the  merchant 
who  had  money  to  receive  was  quite  willing  to  take  bank  bills, 
because  those  to  whom  he  was  under  engagements  were  quite  as 
willing  to  receive  them  from  him.  When  a  bank  bill  of  10,000 
lires  had  thus  passed  into  his  hands,  and  from  his  hands  into 
those  of  another  to  whom  he  was  in  debt,  it  had  made  two  pay 
ments  of  that  sum,  and  discharged  debts  to  the  amount  of  20,000 
lires.  This  was  not  in  virtue  of  any  intrinsic  value  in  the  paper 
bill,  but  because  it  had  been  accepted  in  payment  by  one,  and 
received  from  him  in  payment  by  the  other.  So,  if  the  bill  had 
been  an  undetected  counterfeit,  it  might  have  passed  through  an 
hundred  hands,  each  time  making  as  perfect  a  payment,  and 
effecting  as  complete  a  discharge  of  the  parties,  as  by  any  other 
means.1  The  process  is  the  same  as  if  each  creditor  should  say 
to  his  debtor,  at  the  time  of  payment:  "  I  will  acquit  you  of  the 
ten  thousand  you  owe  me,  if  you  will  furnish  me  the  means  of 
discharging  that  amount  which  I  owe  to  others."  It  matters 
not,  to  the  validity  of  the  payment,  whether  that  debtor  delivers 
to  that  creditor  a  bag  of  coins  containing  the  required  quantity, 

1  We  are  very  far  from  thinking  that  spurious  money  can  make  as  safe, 
or  as  good  a  currency,  as  genuine.  It  is  a  fact,  however,  to  which  we  need 
not  shut  our  eyes,  that  there  is  always  a  considerable  amount  of  counterfeit 
money  in  circulation,  performing  the  office  of  good  money.  The  best  coins 
need  to  have  credit  accorded  to  them,  or  they  cannot  circulate  as  money ; 
if  that  credit  is,  from  ignorance  or  mistake,  given  to  bad  coins,  they  will 
fulfil  the  functions  of  money.  Coins  should  be  good,  that  they  may  deserve 
and  continue  to  enjoy  the  credit  which  is  essential  to  their  continued  use 
as  coins. 


328  BANK-NOTES. 

a  bank-note  of  the  amount,  or  a  paper  giving  him  a  right  to  a 
credit  with  those  to  whom  he  is  bound  to  pay  a  like  sum. 

The  circulation  of  bank  bills  was  a  method  in  detail,  by  which 
those  who  kept  no  direct  account  with  each  other  could  set-off 
their  credits  against  their  debts,  or  apply  the  one  in  discharge 
of  the  other.  Each  one  who  received  a  bank  bill  in  payment, 
and  had  transferred  it  away  in  payment,  had  made  an  entry  on 
each  side  of  the  general  account  of  his  debits  and  credits,  and 
had  to  that  extent  balanced  the  account:  every  succeeding 
operation  of  the  same  kind  was  with  the  same  effect,  and  thus 
the  entries  made  progress  as  time  elapsed,  until  the  balance 
remained  which  would  have  resulted  if  the  whole  proceedings 
had  been  a  mere  act  of  book-keeping.  "What  was  thus  done  by 
one,  was  done  by  all,  and  the  process  of  liquidation  proceeded 
as  men's  liabilities  matured.  It  cannot  be  questioned  that  bank 
notes  have  some  advantages  over  transfers  of  bank  credits :  they 
circulate  everywhere,  and  at  all  times ;  in  bank  hours,  and  out 
of  bank  hours,  day  and  night;  in  country  and  city,  between 
those  who  have  bank  accounts,  and  those  who  have  none ;  be 
tween  the  poor  and  rich,  foreigners  and  citizens,  without  forma 
lity  or  loss  of  time,  and  without  intervention  of  notary,  or  proof 
of  identity ;  and  of  course  no  medium  of  exchange,  so  far  as 
they  are  applicable,  has  ever  been  found  more  convenient  and 
effectual.  The  Bank  of  Genoa,  by  thus  fully  exhibiting  the  ad 
vantages  of  bank-notes,  may  be  considered  as  the  link  which 
connected  the  deposit  banks  with  those  of  circulation.  The 
range  of  usefulness,  however,  of  bank-notes  is  far  less  than  that 
of  deposits :  the  convenience  of  the  former,  to  a  certain  extent, 
is  undoubted ;  but  the  larger  payments  will  always  be  made  by 
deposits. 

Although  the  House  of  St.  George  was  inferior,  in  importance 
and  commercial  utility,  to  the  Bank  of  Venice,  it  was  a  vast 
concern,  of  great  power  and  wealth,  which  enjoyed  for  a  long 
period  high  confidence  in  Europe.  Genoa  was  a  free  port,  so 
called ;  that  is,  an  entrepot  where  goods  could  be  landed,  stored, 
assorted,  and  reshipped  to  any  part  of  the  world,  without  paying 
duties ;  but  all  goods  passing  into  consumption  in  Genoa  were 


BANKING    IN    VENICE    AND    IN    GENOA.          329 

subject  to  duties  collected  by  the  bank,  which  had  also  the  reve 
nue  arising  from  several  hundred  storage-houses  situate  within 
the  enclosure  of  the  free  port,  and  other  similar  perquisites. 

The  Bank  of  Venice,  resting  wholly  upon  the  stability  of  the 
republic,  and  its  own  good  management,  had  a  career  of  com 
mercial  success  and  high  credit  of  more  than  five  hundred  years ; 
but  perished  utterly  with  the  Venetian  government,  offering, 
however,  not  a  penny  as  a  prey  to  its  destroyer.  The  Bank  of 
Genoa  having  a  vested  interest  in  a  large  real  estate,  and  in  the 
revenues  of  the  port,  survived  the  shock  and  the  ravages  of  the 
French  invasion ;  but  shorn  of  its  importance,  its  credit,  and 
of  nearly  all  its  wealth,  which  became  the  prey  of  a  French 
army.  If  the  administration  of  the  House  of  St.  George  had 
been  directed  chiefly  to  commercial  utility,  under  wise  arrange 
ments,  its  constitution  would  have  been  consistent  with  great 
efficiency.  It  might  easily  have  been  placed  in  the  same  rank 
with  that  of  Venice.  The  exterior  circulation  of  notes  issued 
for  deposits  was  an  advantage  not  enjoyed  at  Venice.  In  the 
latter  city,  however,  the  process  of  adjustment  was  better  under 
stood,  and  therefore  more  directly  practised.  It  was  carried  to 
the  utmost  point  of  commercial  convenience,  and  the  resort  to 
payment  in  coins  was  only  when  special  reasons  made  it  neces 
sary  ;  as  when  coins  were  required  for  exportation,  or  in  dealing 
with  foreigners,  or  for  the  retail  trade.  In  Genoa,  the  circula 
tion  of  bank-notes  was  mainly  a  mere  substitution  of  the  notes 
for  coins,  by  which,  indeed,  a  greatly  increased  activity  could  be 
given  to  the  circulation ;  but  the  coins  were  lying,  in  the  mean 
time,  unemployed.  This  bank-note  circulation  cost  the  interest 
of  the  coins  on  which  it  was  based.  In  Venice,  the  government 
took  the  coins  brought  to  the  bank,  and  applied  them  to  the 
public  service,  and  to  that  extent  lessened  the  necessity  of  taxa 
tion,  and  strengthened  the  state,  which  was  the  guarantee  of 
the  bank.  Both  these  banks  were  highly  prized  in  their  respec 
tive  cities,  and  of  great  reputation  abroad;  both  maintained 
their  standing  and  usefulness  longer  than  any  other  banks  have 
ever  done ;  but  in  each  respect,  the  Bank  of  Venice  takes  pre 
cedence. 


330          EXTKACT  FROM  COQUELIN. 

In  an  article  on  banks,  in  the  "Encyclopaedia  of  Law" 
("  L'Encyclopedie  du  Droit"),  M.  Gautier,  speaking  of  banks 
founded  in  imitation  of  that  of  Venice,  remarks,  "that  in  creating 
them  they  established  for  their  use  a  fictitious  money,  or  money 
of  convention,  of  fixed  value,  and  usually  higher  than  that  of  the 
current  money  in  which  their  payments  and  receipts  were  made, 
and  their  accounts  kept,  by  means  of  an  agio  varying  between 
one  and  the  other." 

In  remarking  upon  this,  the  able  author  of  the  article  on 
banks,  in  the  "Dictionary  of  Political  Economy,"  M.  Coquelin 
asks :  "And  why  this  adoption  of  a  fictitious  money  in  the  most 
part  of  the  banks  instituted  at  that  period  ?  Is  it  explained 
by  the  circumstance,  that  the  deplorable  abuse  of  debasing,  coins 
was  then  very  frequent  in  most  of  the  States  of  Europe ;  and 
that,  however  the  Republics  in  which  these  banks  were  esta 
blished  had  avoided  these  abuses,  by  the  relative  wisdom  of  their 
administration,  they  were  yet  not  safe  from  the  invasion  of  de 
based  coins  thrust  upon  them  from  abroad,  thus  deranging  their 
commercial  transactions  ?  It  was  to  give  to  these  transactions 
a  safer  basis  that  the  banks  adopted  an  ideal  money,  which  was 
secure  from  all  alteration. 

"  When  coins  of  gold  or  silver  were  paid  into  one  of  these 
banks,  it  reduced  them  of  course,  after  an  assay  having  for  its 
object  to  show  the  quantity  of  fine  metal  which  they  contained, 
into  the  ideal  money  of  which  it  had  made  choice,  giving  to  the 
coins,  however,  for  greater  safety,  a  value  somewhat  less  than 
they  had  in  reality. 

"  This  substitution  of  an  ideal  money  for  the  current  money 
is,  perhaps,  the  greatest  service  which  these  ancient  banks  of 
deposit  have  rendered.  By  this  means  they  have  at  least  intro 
duced  security  into  their  commercial  relations,  and  endowed  the 
cities  in  which  they  were  situated  with  a  sort  of  relative  credit, 
very  superior  to  that  enjoyed  by  others.  Add  to  this  that,  in 
permitting  merchants  to  effect  their  payments  and  their  receipts 
by  the  simple  method  of  writings,  they  saved  them  in  a  certain 
degree  from  the  care  and  expense  which  ordinarily  attend  the 
handling  and  the  transportation  of  coins.  With  this  exception, 


IMPORTANCE    OF    DISTRIBUTION.  331 

they  have  fulfilled  no  essential  functions  which  belong  to  banks, 
as  we  regard  them  at  the  present  day."  x 

These  remarks,  by  writers  of  high  intelligence  and  authority, 
furnish  striking  instances  of  the  confusion  which  must  prevail  in 
the  minds  of  those  who  treat  of  money,  without  duly  attending 
to  the  distinction  between  money  and  money  of  account.  M. 
Gautier,  who  was  for  a  time  President  of  the  Bank  of  France, 
saw  clearly  that  the  business  of  the  Bank  of  Venice  was  done  by 
means  of  a  money  of  account,  which  he  calls  a  fictitious  money, 
or  money  of  convention.  He  inferred,  erroneously,  that  it  was 
established  or  agreed  upon  solely  for  the  purposes  of  the  bank. 
It  was  not  established  by  any  act  or  agreement  of  the  state  or 
people;  it  was  not  even  contemplated,  nor  thought  of;  it  was 
the  growth  of  circumstances.  In  its  nature  it  was  not  new ;  for 
all  the  coin  and  money  in  previous  use,  and  all  articles  of  com 
merce,  had  their  prices  expressed  in  one  or  more  moneys  of 
account  then  in  use.  It  being  the  invariable  habit  of  people 
familiar  with  prices,  and  the  expression  of  values,  to  fix  the 
denominations  in  which  they  are  expressed  independently  of  the 
coins,  or  other  values,  from  which  they  take  their  origin,  firmly 
and  fully  in  their  minds,  the  people  of  Venice,  in  a  very  few 
months  or  years,  became  perfectly  familiar  with  the  current  value 
of  the  deposits  of  the  Bank  of  Venice.  They  would  soon  cease 
to  make  any  comparison  between  the  denominations  in  which  the 
value  of  these  deposits  were  expressed  and  coins.  They  would 
have  learned  their  value,  independent  of  any  such  comparison. 
If  it  happened  that  nothing  in  the  conduct  of  the  government,  or 
those  controlling  the  bank,  disturbed  the  estimate  made  of  the 
value  of  these  deposits,  the  money  of  account  founded  upon  them 
would  be  fixed.  While  coins  without  were  subject  to  deteriora 
tion  in  many  ways,  and  to  debasement  on  the  part  of  governments, 
and  therefore  to  fluctuation  in  price,  the  deposits  would  remain 
unchanged ;  and  the  money  of  account  founded  on  them  would 
become  more  firmly  fixed  in  the  minds  of  those  who  were  con 
stantly  employing  the  funds  of  the  bank  in  their  current  payments. 

1  Dictionnaire  de  Econ.  Politique,  Paris,  1852,  Art.  "  Banque.'* 


332  M.    COQUELIN    AND    M.    GAUTIER. 

The  explanation  of  M.  Coquelin  is  still  more  unfortunate  than 
the  position  of  M.  Gautier.  It  is  really  very  careless,  if  not  ex 
travagant,  to  say  that  the  chief  service  rendered  by  the  earlier 
banks  of  Europe  was  the  employment  of  this  ideal  money  (mon- 
naie  ideale).  It  is  certainly  to  the  credit  of  Coquelin,  that  he 
perceived  and  appreciated  the  use  of  these  moneys  of  account ; 
but  how  could  he  fail  to  perceive  their  universal  use,  if  he  really 
understood  their  application  in  those  banks !  The  reason  he 
gives  why  the  banks  ever  resorted  to  their  use  is  nothing  to  the 
purpose. 

The  bad  state  of  the  coins,  and  the  debasements  of  the  coinage 
by  public  authority,  were  inducements  to  the  establishment  of 
the  banks,  but  had  nothing  special  to  do  with  the  ideal  money, 
or  moneys  of  account,  which  grew  out  of  the  usages  of  the  banks, 
and  the  mental  habits  of  a  commercial  people.  The  agency  of 
these  moneys  of  account  in  the  commerce  of  that  period  must 
have  struck  the  mind  of  Coquelin  with  great  force,  to  have  in 
duced  the  remark  we  have  cited :  it  only  needed  that  he  should 
open  his  eyes  a  little  more,  to  see  that  the  service  rendered  by 
moneys  of  account  in  that  day  have  been  far  transcended  by 
their  agency,  in  later  times,  in  all  banks,  and  in  all  the  transac 
tions  of  the  credit  system,  of  which  they  are  the  chief  instru 
ment. 

To  exhibit  still  more  evidently  the  difficulty  of  explaining  the 
money  of  Genoa  by  those  who  do  not  observe  the  distinction  be 
tween  money  and  money  of  account,  we  subjoin  the  following 
long  extract  from  the  most  elaborate  work  upon  the  finances 
and  Bank  of  Genoa  which  has  come  to  our  hands.  We  quote 
from  a  chapter,  the  title  of  which  is :  "  The  different  kinds  of 
money  used  at  the  Bank  of  St.  George." l 

"  In  a  city  like  Genoa,  essentially  addicted  to  commerce,  the 
increase  (1'aumento)  to  which  the  effective  money  was  subject, 
in  the  progress  of  years,  could  not  be  overlooked  in  the  payment 
of  debts  of  long  standing ;  and,  in  fact,  we  find  that  a  law  of  the 

1  Memoire  Sopra  Fantico  Debito  Pubblico,  Mutui,  Compere  e  Banco  di  S. 
Giorgio  in  Genova.  Dell  Carlo  Cuneo.  Geneva,  1842,  8vo.,  chap,  xxvi., 
p.  127.  The  author  was  Inspector  of  the  lloyal  Archives. 


MONEYS  OF  THE  BANK  OF  GENOA.      333 

republic,  bearing  date  1637,  recognizes  this  obligation  in  regard 
to  ancient  debts.1  In  the  Bank  of  St.  George,  however,  where 
they  were  always  careful  to  observe  equality  and  justice  in  the 
payment  of  their  dividends,  they  always  calculated  the  increase 
which,  in  the  lapse  of  time,  had  taken  place  in  the  lire  gianuina; 
and,  therefore,  they  always  reduced  the  lire  gianuina  to  the 
value  it  had  at  the  time  the  payment  was  to  be  made.  In  this 
way,  it  was  found  that  the  hundred  lires  di  numerate,  or  gianuina, 
of  which  the  bank  share  was  originally  composed,  was  valued  in 
progress  of  time  at  lires  194.4  fuori  banco  money.2  Such  an 
increase,  however,  is  not  to  be  confounded  with  the  value  of  the 
share  in  commerce,  which,  besides  the  above  increase,  was 
greater  or  less,  according  to  the  greater  or  less  credit  of  the 
bank  in  public  estimation,  as  happens  now  every  day  with  the 
current  price  of  the  public  funds. 

The  moneta  di  paghe  was,  in  substance,  the  value  of  the  paghe 
written  in  moneta  di  numerate,  reduced  as  above  into  moneta 
fuori  banco.  It  was  of  somewhat  less  value  than  moneta  di  nu- 

1  The  increase  here  intended  is  not  of  the  quantity  of  the  money,  but  the 
price.   It  is  notorious,  however,  that  during  the  whole  of  the  15th,  IGth  and 
17th  centuries,  the  value  of  silver  was  declining.     There  was,  strictly,  no 
such  increase  as  the  words  of  the  author  import.     He,  no  doubt,  refers  to 
the  fact  that  the  money  of  account  had  changed,  as  it  did  in  England,  and 
every  European  country.     The  lire  of  the  money  of  account  expressed  a 
less  value,  in  the  progress  of  time,  than  it  had  done  before.   The  lire  of  the 
money  of  account  in  1550  expressed  a  very  different  value  from  that  of 
1650.     A  specific  coin  or  weight  of  silver  was  nominally  of  greater  value, 
because  the  word  lire,  in  which  values  were  stated,  expressed  a  less  value 
in  1650  than  in  1550.     So,  in  England,  a  shilling  once  denoted  the  equiva 
lent  of  the  TJ'Q  of  a  pound  of  silver;  now  it  only  denotes  ^  of  a  pound  of 
silver.     The  increase  spoken  of  by  the  author  was  a  depreciation  of  the 
money  of  account  consequent  upon  the  abuses  of  coinage  by  public  autho 
rity,  by  wear  of  coins,  and  by  frauds,  as  occurred  in  France  and  England. 

2  The  author  is  more  happy  in  stating  what  was  done  by  the  bank  in  the 
payment  of  dividends.     The  shares  consisted  originally  of  100  lires,  as  they 
were  coined  in  1407.     In  declaring  the  dividends  two  centuries  later,  they 
reduced  the  value  of  that  coin  to  its  true  rate  or  price  at  the  time  the  divi 
dend  was  declared.     This  was  done  by  the  money  of  account  used  in  the 
bank,  which  had  not  followed  the  fluctuations  of  the  money  of  account  fuori 
banco. 


334     APPARENT    INCREASE    IN    VALUE    OF    COINS. 

merato  reduced  into  moneta  fuori  banco,  because,  as  we  have 
shown,  the  written  paghe  did  not  become  numerate  until  four 
years ;  therefore,  the  written  moneta  paghe  was  subject,  in  com 
merce,  to  a  discount  greater  or  less,  according  as  the  paghe  were 
of  the  first,  second  or  third  year.1 

"  The  moneta  di  banco  and  fuori  banco  did  not  then  proceed 
from  any  special  operation  or  purpose  of  the  Bank  of  St.  George,2 
but,  as  we  believe,  from  a  continual  inspection  of  the  different 
money-tariffs  published  by  the  Magistrates  of  Money.  Their 
origin  seems  to  have  been  in  this  way :  — 

"  The  republic,  by  the  above  cited  law  of  the  19th  of  Septem 
ber,  1637,  so  much  extolled  by  Carli  in  his  great  work  upon 
money,  legally  established,  perhaps  before  any  other  nation,  that 
as  gold  and  silver  coins  were  subject  to  a  progressive  increase  in 
their  current  value,  it  was  necessary,  not  to  offend  justice,  that 
ancient  debts  should  be  paid  by  reducing  the  value  of  the  money 
or  coins  of  the  time  in  which  the  debt  was  incurred  to  that  of 
the  time  in  which  the  payment  was  made.3  Hence,  the  money- 

*  This  very  obscure  explanation  could  only  be  comprehended  by  those 
who  already  understood  the  subject.     The  fact  was,  that  the  constant  use 
of  these  paghe,  or  deferred  dividends,  as  a  currency,  established  for  them  a 
specific  unit,  or  lire  of  specific  value,  which  became  the  basis  of  a  money 
of  account.     In  this  money  of  account  their  value  or  price  was  always  ex 
pressed,  and  they  were  reduced  to  other  moneys  of  account,  according  to 
the  use  made  of  them.     If  used  out  of  bank,  they  were  turned  into  money 
fuori  banco ;  if  paid  into  the  bank,  on  account  of  revenue,  they  were  con 
verted  into  moneta  di  numerate ;  if  employed  in  the  purchase  or  redemption 
of  bank  shares,  they  would  be  converted  into  moneta  banco.     The  value  of 
these  paghe,  whether  of  the  first,  second  or  third  year,  was  always  expressed 
in  their  own  money  of  account. 

2  These  moneys  of  account  did  not  proceed  from  any  special  plan  or  in 
tention  of  the  bank ;  their  origin  was  that  slow  and  silent,  but  sure  opera 
tion,  by  which  moneys  of  account  are  always  formed  in  a  mercantile  com 
munity,  when  a  new  unit  of  value  is  used,  in  which  prices  are  expressed 
and  payments  are  made.  The  lire,  or  scudo,  as  applied  to  the  bank  shares, 
to  bank  deposits  or  coins  of  full  weight  (moneta  di  numerato),  to  the  paghe 
or  deferred  dividends,  were  such  new  units ;  and  upon  each  a  money  of 
account  was  formed,  in  which  the  books  of  the  bank  were  kept,  each  in 
their  respective  department. 

*  Here  we  have  a  public  law  of  Genoa  cited  as  recognising  that  gold  and 


EXPLANATION  OF  THE  INCREASE.      335 

tariffs  were  specially  intended,  in  Genoa,  to  give  notice  every 
year,  or  every  six  months,  of  the  value  of  the  silver  scudo  at  the 
time  in  which  the  publication  was  made.  Prior  to  1730  we  have 
not  succeeded  in  finding  any  money-tariff  in  which  the  distinc 
tion  is  made  between  moneta  di  banco  and  moneta  fuori  banco ; 
but  in  the  said  statute  we  find  a  statement  concerning  the  money 
of  Genoa,  which  indicates  the  value  of  the  scudo  from  year  to 
year,  down  to  1681,  when  it  was  lires  7.12. 

"  It  seems  that,  after  this  period,  the  Magistrates  of  Money 
believed  it  to  be  their  duty  not  to  permit  any  increase  beyond 
that  rate,  since  there  are  extant  some  decrees  made  by  these 
magistrates,  in  which  they  threaten  with  the  penalties  of  bank 
ruptcy  those  who  exchange  money  at  a  higher  rate  than  that 
fixed  in  the  tariff;  and  from  1682  to  1730,  we  have  met  with  no 
tariff  in  which  the  value  of  the  scudo  is  placed  higher  than 
lires  7.12. 

"  We  cannot  state  with  precision  the  reason  why  the  Magis 
trates  of  Money  believed  it  to  be  their  duty  to  maintain,  for  so 
long  a  time,  the  value  of  the  scudo  at  lires  7.12.  We  find,  how- 
silver  coins  were  subject  to  a  progressive  increase  of  value  —  a  statement 
which  can  only  be  true  as  the  price  of  these  metals  was  expressed  in  a 
changing  money  of  account.  Carli,  the  eminent  writer  on  money  quoted 
in  this  paragraph,  supplies  a  remarkable  explanation  of  this  difficulty  when 
treating  of  the  money  of  Milan.  He  informs  us  that  the  apparent  increase 
of  the  zecchin  of  Milan  in  five  centuries,  from  1261  to  1750,  was  as  1  to 
14.10 :  that  is,  that  coin  during  all  that  period,  of  the  same  weight  and 
standard,  was  quoted,  in  1261,  as  worth  1  lire ;  and  as  worth  lires  14.10s. 
in  1750.  He  gives,  %no  doubt,  the  correct  explanation.  Prices  were  ex 
pressed  in  lires  and  denari,  or  pennies,  which  was  the  common  money  of 
account.  The  payments  of  retail  were  made  in  copper  and  billon,  or  other 
base  money,  or  at  least  to  such  an  extent,  that  the  value  of  the  lire  was  esti 
mated,  by  the  mass  of  the  people,  through  this  base  money.  In  the  five 
centuries  mentioned,  the  base  money  was  degraded  by  the  government  very 
nearly  in  the  proportion  of  the  apparent  increase  of  the  zecchin.  Carli  says 
there  were  many  opinions  on  the  subject ;  but  he  sustains  his  own  in  away 
to  leave  no  doubt  of  his  correctness.  We  believe  this  is  the  true  explana 
tion  for  Genoa.  The  ordinary  money  of  account,  in  this  long  series  of 
years,  was  changed  by  the  degradation  of  the  lower  coins,  which  the  people 
handled  most.  Economists  Italiani,  Carli,  vol.  ii.,  p.  12.  Custodies  Collec 
tion,  Modern  Part,  vol.  xiv. 


336  DEPOSITS    WITH    A    PREMIUM. 

ever,  that  these  magistrates,  in  the  tariff  of  the  year  1741,  per 
haps  for  the  first  time,  distinguished  the  moneta  di  banco  from 
the  moneta  fuori  banco,  giving  to  the  silver  scudo  the  value  of 
lires  7.12  in  moneta  di  banco,  and  the  value  of  lires  9.10  in 
moneta  fuori  banco. 

"  From  this  we  believe  it  may  be  inferred  that  the  Magistrates 
of  Money  fearing,  perhaps,  that  the  continued  increase  in  the 
value  of  the  silver  scudo  would  prove  injurious  to  the  Bank  of 
St.  George,  determined  to  put  an  end  to  that  increase  by  means 
of  their  annual  tariffs,  and  to  keep  it  at  the  rate  of  lires  7.12. 
But  as  the  force  of  circumstances  proved  stronger  than  the 
power  of  the  magistrates,  they  were  obliged  to  abandon  this 
idea,  and  to  fix  the  scudo  in  moneta  di  banco  at  lires  7.12,  which 
was  the  value  at  which  they  received  and  paid  it  at  the  Bank 
of  St.  George,  and  in  moneta  fuori  banco  at  lires  9.10,  which 
was  the  value  in  commerce. 

"  The  Bank  of  St.  George,  however,  in  1751,  looking  more  to 
its  own  convenience,  and  seeing  that  the  difference  between  the 
moneta  di  banco  and  that  of  fuori  banco  had  gone  up  already  to 
a  premium  of  twenty-five  per  cent.,  determined  that  from  that 
year  deposits  of  money  should  be  made  in  the  bank  in  moneta  di 
banco,  at  a  premium  of  twenty-five  per  cent.,  and  that  they 
should  be  repaid  at  the  same  premium. 

"  The  moneta  di  permesso  enjoyed  only  a  premium  of  fifteen 
per  cent,  over  moneta  di  banco,  as  we  find  from  the  tariff  of 
1755.  We  cannot  give  any  account  of  the  origin  of  this  money? 
since  precise  dates  are  wanting  for  that  purpose ;  but  as  we  find 
in  the  published  tariffs  that  there  were  current'  many  scudi  much 
worn,  which  were  permitted  to  circulate  at  a  value,  in  moneta 
fuori  banco,  less  than  lires  9.10,  it  is  probable  that  from  this 
permission  the  moneta  di  permesso  had  its  origin.1 

"  We  have  not  intended,  by  these  observations,  to  furnish  any 
definitive  system  of  the  moneys  of  Genoa,  but  present  them  as 

1  It  is  not  material  for  our  purpose  to  expose  the  very  serious  errors  in 
this  paragraph.  They  are  BO  great,  as  to  create  the  suspicion  of  a  misprint. 
The  next  paragraph  discloses  that  the  author  had  no  great  confidence  in 
this  portion  of  his  labors. 


GEORGE  BATTA  GONDOLFO.          337 

our  opinions,  in  the  hope  of  exciting  ulterior  researches  upon 
this  subject ;  and  as  a  learned  lover  of  the  history  of  his  coun 
try,  George  Batta  Gandolfo,  librarian  to  the  University  of 
Genoa,  is  collecting  precious  materials  concerning  the  money  of 
Genoa,  with  the  view  of  preparing  an  extensive  work,  which  can 
not  fail  to  be  of  the  highest  interest,  we  hope  much  time  will  not 
elapse  before  we  shall  have,  upon  this  subject,  statements  and 
explanations  sufficient  to  make  the  whole  matter  entirely  plain." 


NOTE    TO    CHAPTER    XIV. 

IF  the  work  of  G.  B.  Gandolfo  has  ever  seen  the  light,  it  has  not  been  our 
fortune  to  meet  with  it.  There  are,  however,  materials  in  abundance  within 
reach  of  any  one  desirous  of  thoroughly  understanding  the  money  system 
of  Genoa.  They  will  be  found  in  the  works  cited  ante,  pages  186,  187, 
and  in  others  of  like  character.  From  the  contemporaneous  works  on  com 
merce  and  money,  to  which  the  bankers  and  merchants  of  that  time  resorted 
for  guidance,  we  can  now  obtain  reliable  information  ;  and  by  the  study  of 
these  merchant's  guides,  in  the  order  of  time,  the  history  of  Genoese  money 
may  be  traced.  Italy  has  furnished,  besides,  many  great  works  on  money, 
being  famous  for  the  worst  coins,  and  the  best  writers  on  coinage :  among 
these  we  refer  to  some  of  the  more  distinguished :  Davanzati,  Serra,  Tur- 
bulo,  Galliani,  Corniani,  Scaruffi,  Carli,  Vasco.  A  reference  to  others  may 
be  found  in  the  note  at  page  108. 

Although  Carlo  Cuneo,  from  whom  we  have  made  the  long  extract  at  the 
close  of  this  chapter,  has  failed  in  adequate  statement  and  appreciation  of 
the  moneys  of  Genoa,  his  work,  as  a  whole,  is  invaluable,  and  furnishes  de 
tails  which  can  nowhere  else  be  found,  without  researches  which  very  few 
have  it  in  their  power  to  make.  The  Bank  of  St.  George,  doubtless,  yet 
contains  all  the  documents  needful  to  afford  materials  for  its  history  ;  but 
it  seems  they  are  guarded  with  a  jealous  care,  which  places  them  out  of  the 
reach  of  the  ordinary  inquirer.  Cuneo  furnishes  a  reference  to  his  autho 
rities,  which  shows  that  his  researches  were  thorough  and  extensive.  The 
Appendix  gives  fac-similes  of  three  different  forms  of  the  manuscript  bank 
bills  issued  by  the  Bank  of  Genoa. 

The  following  is  from  a  Commercial  Dictionary  published  in  Paris  :  — 

"  La  Banque  de  Genes  date  de  1407.  C'etait  aussi  une  banque  de  de"p6t, 
mais  6tablie  sur  une  plus  grande  echelle  que  celle  de  Venise,  et  qui  a  ob- 
tenu  beaucoup  plus  de  c61ebrit6  en  Europe.  Son  fonds  primitif  fut  com- 

22 


338  NOTE    TO    CHAPTER    XIV. 

pose  de  proprietes  domaniales,  appartenant  a  PEtat  et  administrees  par  une 
corporation  qui  devint  plus  tard  le  conseil  et  le  gouvernement  de  la  banque. 
On  peut  la  considerer  comme  un  grand  mont-de-piete  commercial  destine  a 
faire  des  avances  aux  citoyens,  moyennant  certaines  conditions  plus  on 
moins  favorables,  selon  les  circonstances.  Elle  etait  administree  avec  une 
extreme  severite  et  tout  ce  que  nous  savons  de  son  organisation  prouve 
qu'elle  fut  plutot  une  institution  financiere  liee  aux  int6rets  du  gouverne 
ment,  qu'une  caisse  ouverte  aux  besoins  des  particuliers.  Elle  requt  un 
terrible  6chec  lois  de  1'invasion  des  Autrichiens  vers  le  milieu  du  dernier 
siecle,  et  elle  a  cess6  d'exister  avec  la  re"publique  de  Genes."  —  "Diction- 
naire  du  Commerce,  Gillaumin  &  Co.,  Paris,  1839,  vol.  i.,  p.  210,  Art. 
"  Banque." 

This  is  calculated  to  mislead.  The  Bank  of  Genoa  was  only  on  a  larger 
scale,  because  more  connected  by  its  constitution  with  political  affairs. 
Holding  among  its  guarantees  such  possessions  as  Corsica  and  the  Isle  of 
Cyprus,  and  having,  by  its  large  number  of  officers,  a  strong  voice  in  the 
government  of  Genoa,  it  drew  the  attention  of  all  concerned  in  the  public 
affairs  of  that  city.  In  commercial  power  and  efficiency  it  was  far  inferior 
to  the  Bank  of  Venice.  This  extract  is  another  illustration  of  the  mistaken 
notions  which  prevail,  even  among  well-informed  persons,  in  relation  to 
the  Banks  of  Genoa  and  Venice. 


CHAPTER    XV. 

THE    BANK    OF    ENGLAND. 

$  1.  Opinions  and  projects  on  the  subject  of  credit  and  currency  previous  la 
the  charter  of  the  Bank  of  England  —  Samuel  Lambe's  plan,  1665  —  Evils 
of  the  coinage  —  Dr.  Hugh  Chamberlain's  plan,  1665  —  Large  model  of  a 
Bank,  1678  — Bank  of  Credit,  1^1  — Bank  of  Credit,  1683  —  7?.  Mur 
ray's  plan,  1695  —  J.  Asgill's  plan,  1696—  Office  of  credit,  1698. 

THE  Insular  position  of  Great  Britain  preserved  the  people,  in 
some  degree,  from  some  of  the  mischiefs  and  vexations  of  a  mul 
titude  of  mints,  and  a  multifarious  coinage.  The  annals  of 
English  commerce  show,  however,  that  grievances  arising  from 
their  coinage,  even  subsequent  to  the  period  of  the  heptarchy, 
were  by  no  means  insignificant.  We  might  illustrate  this  by 
citations  from  writers  of  every  age  from  William  the  Conqueror. 
Matthew  Paris,  in  his  "Chronicles,"  says  that  "in  those  days 
the  money  of  England  was  so  intolerably  abused  by  detestable 
clippers  and  false  coiners,  that  neither  the  English  inhabitants, 
nor  even  foreigners,  could  look  upon  it  without  being  deeply 
grieved  (illteso  corde) ;  for  it  was  clipped  almost  to  the  inner 
most  ring,  and  the  border  of  letters  either  wholly  taken  away, 
or  very  much  diminished."1  —  Ad  annum,  1248,  32  Henry  III. 
"Ipsis  quoque  diebus  Moneta  Anglicoe,  $c"  In  the  reign  of 
Elizabeth,  a  reform  of  the  coinage,  arising  from  these  and  simi 
lar  abuses,  was  undertaken ;  and  in  the  "  Summarie  of  Certain 
Reasons"  for  the  measures  then  adopted,  we  are  informed  that, 
"  for  these  base  monies,  there  has  been  carried  out  of  the  realme 
the  rich  commodities  of  the  same,  as  wolle,  cloth,  lead,  tinne, 
leather,  tallowe,  yea,  and  all  kinds  of  victual,  as  come,  salt, 

1  See  Diseases  of  Coin,  1696. 

(339) 


340  LAMBE'S  BANK,   1657. 

beer,  butter,  cheese,  and  such  like,  so  as  counterfaieters  have, 
for  small  summe  of  monies,  carried  out  six  times  the  value  in 
commodities  of  the  realme." 

Among  the  earliest  advocates  of  banks  in  England  whose 
works  are  before  us,  is  Samuel  Lambe,  a  well-known  London 
merchant,  who  lived  in  the  days  of  Charles  the  First,  but  did 
not  publish  the  pamphlet  we  are  about  to  notice  until  the  year 
1655,  in  the  time  of  Cromwell,  to  whom  it  is  thus  addressed : 
"Seasonable  Observations  humbly  addressed  to  his  Highness  the 
Lord  Protector." 1  One  of  his  chief  objects  is  to  show  the  advant 
age  the  Dutch  people  had  over  England,  by  reason  of  their  banks : 
"  The  benefits  they  have  received  by  banks  are  these :  By  the 
help  thereof  they  have  raised  themselves  from  poor  distressed,  to 
high  and  mighty  States.  They  have  increased  the  general  stock 
of  their  own  country  so  much,  that  they  can,  when  they  please, 
ingross  the  particular  commodity  of  one  country,  and  sell  it 
again  at  their  own  price  in  the  same,  or  another  that  wants  it : 
they  furnish  many  facilities,  as  well  as  profits,  in  time  of  war : 
they  have  thus  grown  so  strong,  that  they  make  peace  with  other 
nations  on  their  own  terms,  as,  for  instance,  Denmark  and 
France :  they  make  war  with  the  English  at  sea,  to  whom  they 
there  always  yielded :  they  rule  over  many  petty  powers  in  the 
East  Indies." 

"  The  prejudice  we  receive  by  banks  are  these :  It  brings 
down  the  interest  of  money  to  three  per  cent.,  at  which  rate 
men  in  Holland  borrow  money,  and  lend  it  again  in  England  at 
six  or  eight  per  cent. :  they  furnish  money  to  make  purchases  in 
England  at  the  cheapest  seasons  of  the  year,  which  are  again 
sold  ten  per  cent,  cheaper  than  the  regular  English  merchant 
can  sell  them  in  London."  This,  Lambe  says,  the  English  mer 
chant  cannot  do  for  want  of  capital,  and  he  cannot  borrow  the 
money  at  less  than  six  per  cent.,  besides  u  procuring  and  con 
tinuance,"  that  is,  a  commission  for  obtaining  the  loan  and 
renewal  of  it. 

1  Trade,  Shipping  Banks,  by  Samuel  Lambe,  1057. 


PLAN    OF    THE     BANK.  341 

"  The  good  we  may  do  ourselves  by  banks,  if  settled  in  Eng 
land,  are  many,  for  no  nation  ever  yet  made  use  of  them  but 
they  flourished  and  thrived  exceedingly :  they  will  by  well  order 
ing  of  them,  bring  back  the  gold  and  silver  drained  out  of  this 
land  by  the  Hollanders'  banks :  they  will  increase  the  stock 
(capital)  of  this  land  :  they  will  increase  the  fisheries,  navigation 
and  shipping :  they  will  increase  the  revenues  and  customs :  they 
will  wonderfully  employ  the  poor,  and  increase  manufactures 
and  foreign  trade :  they  will  increase  trade  in  our  plantations, 
and  cause  ships  to  be  built  in  New  England  as  good,  or  better, 
than  any  built  in  Holland,"  &c.,  &c. 

His  definition  of  a  bank  is  "A  certain  number  of  sufficient 
men  of  estates  and  credits  joined  together  in  a  joint  stock,  being, 
as  it  were,  the  general  cash-keepers,  or  treasurers,  of  that  place 
where  they  are  settled,  letting  out  imaginary  money"  (credit  ex 
pressed  in  money  of  account)  "  at  interest,  at  two  and  a  half  or 
three  per  cent.,  and  making  payments  thereof  by  passing  each 
man's  account  from  one  to  another,  with  much  facility  and  ease, 
and  saving  much  trouble  in  receiving  and  paying  money."  He 
then  illustrates,  by  an  example,  how  a  credit  thus  given  may  be 
transferred  very  many  times,  and  come  at  last  unto  the  merchant 
who  first  issued  it,  all  the  debts  for  which  it  was  transferred 
being  fully  paid. 

The  constitution  of  Mr.  Lambe's  proposed  bank  was  peculiar, 
and  illustrates  the  prevailing  opinions  on  the  power  and  uses  of 
credit.  "  That  the  society  of  good  men,  or  governors,  that  shall 
manage  the  banke  be  chosen  by  the  several  companies  of  mer 
chants  of  London,  viz. :  East  India,  Turkey,  Merchant  Adven 
turers,  East  Countrey,  Muscovia,  Greenland,  and  Guynne  Com 
panies,"  each  company  choosing  two  or  more,  and  filling  their 
own  vacancies.  The  persons  thus  chosen  and  met  together 
"  shall  choose  to  themselves  two  or  more  of  the  ablest  merchants 
that  trade  chiefly,  or  altogether,  for  Spain,  and  the  like  who 
trade  for  France,  Italy  and  the  West  Indies,  for  each  place  two 
or  more,  as  shall  be  thought  fitting,"  &c.  "  Such  a  society, 
knowing  most  English  merchants  that  trade  to  all  parts,  and 
thereby  knowing  whom  to  credit,  and  by  their  knowledge  will 


342  PLAN    OF    THE    BANK. 

well  understand  how  to  govern  the  banke,  and  by  the  help 
thereof  to  countermine  the  Dutch  in  their  designs  in  any  part 
of  the  world  where  they  prejudice  the  English  by  their  bankes." 
The  bank  was  to  be  open  to  receive  deposits,  which  were  to  be 
repayable  on  demand ;  "  interest  to  be  allowed  on  deposits  to 
the  aged  and  widows" — "  imaginary  money,  or  credit,  to  be  let  out 
upon  ticket"  (that  is,  subject  to  transfer)  "  at  two  and  a  half  and 
three  per  cent."  "All  bills  of  exchange  to  be  received  and  paid 
in  banke.  The  chosen  men  may  take  a  house  near  the  Exchange, 
and  set  there  certain  hours  every  day :  that  the  good  men  who 
manage  the  banke  make  up  their  accounts  once  in  every  year : 
that  the  profits  of  the  banke  go  to  the  good  men  that  manage 
the  same,  in  lieu  of  their  great  care  and  pains,"  and  defraying 
all  charges :  a  reserve,  however,  of  a  portion  of  the  profits  to  be 
made  to  increase  the  credit  and  power  of  the  banke :  "  that  the 
banke  also  furnish  another  banke  with  competent  stock,  to  let 
out  any  summe  of  money  under  <£5,  or  <£10,  at  reasonable  rates ; 
for  many  poore  people  are  now  forced  to  give  intolerable  rates, 
as  about  6d.  per  week  for  the  use  of  20  shillings." 

It  is  a  remarkable  feature  of  this  plan  of  a  bank  by  an  intel 
ligent  London  merchant,  that  it  proposes  no  capital,  nor  any 
fund  paid  in,  by  the  good  men  who  were  to  manage  and  to  re 
ceive  the  profits.  It  does  not  clearly  announce  that  the  depo 
sits  were  to  be  lent,  as  a  source  of  profit ;  if  that  were  intended, 
it  was  evidently  not  the  main  object.  The  chief  business  of  the 
bank  was  to  consist  in  the  issue  of  credits,  to  be  circulated  or 
transferred  on  its  books.  The  person  at  whose  instance  such 
credit  was  to  be  issued  must,  of  course,  give  the  bank  some  secu 
rity  or  guarantee  adequate  to  the  amount  of  the  credit  asked 
for :  this  may  have  been  a  promissory  note,  bill  of  exchange  of 
the  applicant,  or  of  some  other  person,  or  it  may  have  been  gold 
or  silver  bullion,  or  a  bond  or  mortgage.  The  credit  would  not 
have  been  granted  without  some  sufficient  guarantee  that  it  would 
be  redeemed,  and  the  interest  paid.  As  no  permanent  capital 
was  proposed,  it  was  not  intended  that  the  credits  issued  should 
be  permanent,  but  that  all  should  be  redeemable  and  extinguish- 
able  on  the  return  of  the  security. 


EVILS    OF    COINAGE,     1696.  343 

The  plan  differed,  therefore,  materially  from  any  of  the  conti 
nental  banks.  Taking  the  Banks  of  Venice  and  Amsterdam  as 
types  of  these,  it  differed  from  the  first,  which  only  circulated 
on  its  books  the  debt  of  the  State ;  and  from  the  second,  which 
only  circulated  the  ownership  of  an  actual  deposit  of  coin  or 
bullion  ;  whilst  the  proposed  bank  was  intended  only  to  circulate 
a  credit  issued  for  the  occasion  upon  special  security :  it  was  in 
tended  merely  to  be  a  substitution  of  the  better  credit  of  the 
bank  for  the  credit  of  the  applicant.  If  the  credit  of  the  bank 
should  not  be  more  available  than  that  of  the  individual,  it  would 
not  be  applied  for,  nor  would  it  be  received  by  those  who  could 
not  use  it  in  payment.  This  was,  then,  a  bold  conception  of  the 
power  of  credit,  and  contemplated  a  high  state  of  confidence  and 
unblemished  commercial  integrity.  Mr.  Lambe  plainly  aimed 
at  a  procedure  like  that  now  carried  on  by  our  system  of  bank 
deposits.  When  a  note  is  discounted  according  to  our  modern 
system  of  banking,  a  credit  is  given  for  the  proceeds  on  the 
books  of  the  bank ;  and  the  credit  thus  given  is  transferable  at 
the  pleasure  of  the  holder,  until  extinguished  by  payment  of  the 
security  on  which  it  is  founded. 

The  state  of  the  coin  in  the  17th  century  forced  the  whole 
subject  of  money  and  currency  very  specially  upon  public  atten 
tion.  A  writer,  1696,  commences  a  pamphlet  on  this  topic  in 
these  words  :  "  The  inconvenience  and  mischiefs  that  the  cur 
rency  of  clipt  and  counterfeit  money  necessarily  occasions  are 
so  manifest  to  everybody,  that  it  is  as  needless  to  point  at  any 
of  them  as  it  is  impossible  to  enumerate  alj.  It  violates  all  con 
tracts,  and  alters  the  measure  of  trade,  breeding  confusion  in  all 
commerce,"  &C.1 

Some  of  the  bitterest  discontents  of  the  English  people  with 
which  their  annals  make  us  familiar,  have  arisen  from  the  condi 
tion  of  their  coinage.  Prudential  measures  were  devised  by 
Edward  the  Sixth,  but  not  fully  executed ;  the  reform  was  left 
to  be  more  fully  carried  out  by  Elizabeth,  who  took  all  the  credit 
of  having  accomplished  what  Edward  could  not,  and  Mary  dared 

1  Currency  of  Clipt  Money,  1696. 


344  OPINIONS    ON    BANKS. 

not  do.1  But  crying  as  this  evil  of  debased  and  deteriorated 
coins  was  in  England,  it  fell  far  short  of  the  corresponding  mis 
chief  on  the  continent,  and  did  not  lead  to  the  remedy  adopted 
there,  of  establishing  banks  of  deposit,  in  which  the  coins  might 
be  placed  once  for  all  out  of  the  reach  of  the  clipper  and  sweater, 
not  subject  to  wear,  and  safe  from  the  debasing  schemes  of  men 
in  power.2  These  banks  were  multiplied  on  the  continent  during 
the  first  half  of  the  17th  century.  There  appears  to  have  been 
no  attempt  of  the  kind  made  in  England  during  that  time.  In 
the  latter  half  of  that  century,  the  subject  of  banks  occupied 
very  much  of  the  attention  of  the  English  public.  A  vast  number 
of  plans,  and  projects  of  banks,  were  brought  before  the  public. 
Not  one  of  these,  so  far  as  we  know,  or  can  learn  from  a  large 
number  of  publications  of  that  period  now  before  us,  on  the  sub 
ject  of  money  and  banks,  proposed  a  bank  for  the  deposit  of 
coins  or  bullion.  They  all  looked  to  banks  as  instruments  of 
credit,  the  chief  advantage  of  which  would  be  the  furnishing 
some  substitute  for  money  —  some  form  of  credit  to  circulate  in 
the  place  of  money.  The  success  of  the  goldsmiths,  and  other 
private  bankers  of  London,  in  issuing  their  notes  payable  to 
bearer  on  demand,  had  been  recently  remarked,  and  it  had  ex 
cited  the  imaginations  of  men  of  business  as  to  the  power  and 
utility  of  credit.  The  goldsmiths  not  only  issued  such  notes  for 
circulation  in  place  of  money,  but  also  bonds,  or  sealed  bills, 
bearing  interest,  but  payable  at  a  fixed  day :  these  were  also 
employed  as  a  currency.  The  public  mind  thus  excited  on  the 
subject  of  credit,  and  teeming  with  hopes  of  some  great  delivery 
from  the  evils  of  the  money  system,  began  to  bring  forth  plans 
of  banks,  and  schemes  of  credit. 

We  shall  notice  a  few  from  publications  of  that  period,  of 
which  the  author  of  a  " Discourse  on  Money"  says:  "I  see 
many  printed  proposals  of  banks  of  a  lower  rate ;  projects  and 
funds  of  gain  and  security,  &c.,  to  adventurers,  everywhere  pub- 

1  Camden,  in  his  life  of  Elizabeth,  thus  speaks  of  this  achievement  of  the 
Queen:  "Magnum  sane,  memorandum,  quod  neque  Edwardus  potuit  neque 
Maria  ausa."  —  Page  61. 

2  Essay  on  Money  and  Coins,  London,  1757. 


OFFICE    OF    CREDIT,     1665.  345 

lished  and  pressed  on  the  people*"     This  he  afterwards  calls 
"  fishing  for  gudgeons."  1 

"  The  office  of  credit,  by  the  use  of  which  none  can  possibly 
sustain  loss,  but  every  man  may  certainly  receive  great  gain  and 
wealth,  with  a  plain  demonstration  how  a  man  may  trade  for  six 
times  his  stock,  and  never  be  trusted ;  and  that,  if  generally  re 
ceived,  there  can  afterwards  no  accident  happen  to  cause  a  dead- 
ness  or  slowness  of  trade,  except  wars,  nor  need  men  make  any 
more  bad  debts" — is  the  title  of  a  pamphlet  by  Dr.  Hugh  Cham 
berlain,  published  in  1665.  His  project  is  :  u  Neither  bank  nor 
lumbard,  because  the  foundation  of  credit  in  bank  is  money, 
and  here  it  is  goods  and  merchandise.  And  for  goods  received 
in  a  lumbard,  they  deliver  out  money,  and  here  credit ;  and  yet 
it  is  like  both ;  for,  after  the  same  manner  and  limitations,  in 
every  respect,  as  goods  are  received,  stored  and  preserved  in  a 
lumbard,  shall  they  be  in  this  office;  and  credit  shall  be  delivered 
out  and  transferred  exactly  after  the  manner  as  it  is  in  foreign 
banks."  The  meaning  of  this  is,  that  parties  making  deposits 
of  goods  shall,  for  the  value  agreed,  receive  a  credit  for  the 
amount  on  the  books  of  the  office,  transferable  in  the  same  man 
ner  as  at  the  Banks  of  Venice  or  Amsterdam.  The  object  was 
to  make  goods  a  material  for  deposit,  instead  of  money,  as  in  the 
banks  of  the  continent  at  that  day,  or  the  proceeds  of  notes  dis 
counted  at  the  present  day.  The  check,  or  order  of  transfer, 
was  to  be  in  this  form :  — 

Gentlemen:  —  Pray  make  A.  B.  creditor  for  £100,  and  me  debtor 
for  the  like  sum,  for  which  this  shall  be  your  warrant. 
To  the  Society  of  the  £ 
Office  of  Credits.        $ 

It  was  designed  that  the  office  should  become  a  great  depo 
sitory  of  goods,  to  the  mutual  advantage  of  buyers  and  sellers. 
Heavy  stocks  of  goods,  instead  of  being  in  the  warehouse  of  the 
purchaser,  were  to  be  placed  in  the  depositories  of  the  office, 
where  the  seller  obtained  a  credit  for  them,  whilst  the  purchaser 
could  withdraw  them  as  his  sales  progressed,  and  only  make  his 

1  London,  1696,  page  141. 


346          LARGE  MODEL  OF  A  BANK. 

payments  at  the  same  rate.  The  whole  scheme  is  developed 
with  ingenuity  and  earnestness. 

In  1678,  appeared  "  Proposals  to  the  King  and  Parliament  of 
a  Large  Model  of  a  Bank,  Showing  how  a  fund  of  a  bank  may 
be  made  without  much  change,  or  any  hazard,  that  may  give  out 
bills  of  credit  to  a  vast  extent,  that  all  Europe  will  accept  of, 
rather  than  money,  by  M.  Lewis."  His  preface  says :  "All 
men  are  satisfied  a  bank  is  very  advantageous  to  a  nation,  &c., 
&c. ;  but  the  great  question  hath  been,  how  to  make  a  fund  that 
shall  be  credited  by  all,  without  vast  quantities  of  ready  cash  or 
bullion  to  lie  dead,  which  we  have  not  to  spare  for  such  a  pur 
pose." 

The  author  of  the  "  Large  Model"  proposes  that  the  whole 
kingdom  shall  be  divided  into  three  or  four  hundred  precincts, 
in  each  of  which  shall  be  an  officer  of  the  bank,  with  officers  and 
assistants  appointed  or  elected  by  the  people  of  the  precinct, 
which  was  to  be  responsible  for  the  conduct  of  these  officers,  and 
for  the  safety  of  all  money  deposited  with  them.  This  was  upon 
the  principle  of  the  English  common  law,  that  every  hundred 
was  liable  to  make  good  any  robbery  committed  within  it.  It 
was  supposed  this  would  secure  competent  and  faithful  officers. 
These  branches,  or  offices,  were  to  draw  upon  each  other,  accord 
ing  to  the  demands  of  business,  so  as  to  make  the  domestic 
exchange  as  easy  as  possible,  by  receiving  money  at  any  office, 
and  paying  it  out  at  any  other  office.  Bills  of  credit  were,  upon 
demand,  to  be  issued  to  any  requesting  them,  upon  deposit  of 
the  equivalent  amount  in  money.  These  bills  were  transferable 
certificates  of  deposit.  But  bills  of  credit  were  to  be  issued  upon 
deposit  of  any  other  articles  of  value.  The  author  of  this  scheme 
asserts  that  "  a  bill  of  exchange,  or  a  bill  of  credit,  that  is  trans 
ferable  upon  a  good  man  is  as  good  as  money,  for  money  is 
nothing  but  a  medium  of  commerce,  or  security  for  a  while,  that 
when  we  part  with  one  thing  we  can  spare,  we  may  purchase 
another  thing  of  the  like  value."  He  instances  many  cases  of 
such  bills  passing  as  money  in  England.  "Diverse  citizens" 
bills  at  this  day  are  accepted  as  current,  though  they  have  no 
other  security  but  the  honesty  of  the  man,  and  the  supposition 


BANK    OF    CREDIT,     1682.  347 

of  an  estate ;  and  yet  many  are  glad  to  leave  their  money  in 
such  hands,  -without  interest,  for  safety.  I  heard  a  person  of 
quality  say  that  he  saw  the  same  money  transmitted  nine  times 
in  one  morning,  by  writing  of  the  credit  from  one  to  another, 
and  the  money  in  specie  was  left  untouched  at  last." 

The  details  of  this  model  of  a  bank  are  set  forth  most  elabo 
rately,  and  the  whole  plan  consistently  developed,  with  a  great 
variety  of  ingenious  and  instructive  illustrations.  Among  other 
facts  referred  to,  is  one  in  regard  to  the  Bank  of  Venice,  which 
we  have  not  met  elsewhere.  It  is  well  known  that  the  bank 
money  of  Venice  maintained  a  value  far  above  specie ;  and  this 
premium  rose  so  high,  as  to  call  for  public  interposition,  which 
fixed  the  premium  at  twenty  per  cent.,  and  that  this  was  after 
wards  avoided  by  a  sur  agio,  or  a  premium  on  the  twenty  per 
cent.  Mr.  Lewis  informs  us  that  a  sagacious  merchant  of  Venice 
suggested  a  method,  at  last,  by  which  the  difficulty  was  overcome : 
Whenever  the  tendency  of  the  bank  money  was  too  strongly  up 
ward,  the  bank  tendered  the  specie  itself  in  payment  of  credits  ; 
that  is,  the  party  who  expected  to  receive  bank  money,  or 
credits,  in  payment,  was  paid  in  specie  by  the  bank  ;  so  that  he 
who  attended  at  bank  to  receive  a  payment,  did  not  know  but 
that  he  would  receive  payment  in  gold  or  silver.  This  method  * 
could  be  brought  to  bear  very  effectively  upon  those  who  were 
disposed  to  monopolize  the  deposits,  or  bank  money.  One  chief 
cause  of  the  premium  upon  bank  credits  was,  that  bills  of  ex 
change  were  payable  in  them ;  and  men  who  had  bills  to  pay 
were  obliged  to  procure  bank  credits  for  that  purpose.  Specu 
lators,  however,  would  be  repelled  by  the  plan  mentioned  by 
Lewis. 

A  publication,  dated  in  1682,  bears  the  title  of  "  Corporation 
Credit,  or  a  Bank  of  Credit,  made  current  by  common  con 
sent  in  London,  more  useful  and  safe  than  money."  This  was 
a  proposal  addressed  to  the  authorities  of  that  city,  referred  by 
them  to  a  committee,  upon  report  of  which  the  plan  was  ap 
proved,  and  the  bank  authorized.  The  plan  of  working  this 
bank  did  not  differ  very  much  from  that  of  Lambe's,  but  it 
required  a  subscribed  and  paid-up  fund  as  "  a  fund  or  founda- 


348  THE    POWER    OF    CREDIT. 

tion  of  honor,"  which  might  be  paid  in  tin,  lead,  copper,  steel, 
or  iron,  raw  silk,  wool,  or  cotton,  or  in  brass  or  iron  wyre,  lin- 
nen  cloth  or  calicoes,  or  other  goods  sufficient  to  raise  the  money 
subscribed.  Sixteen  reasons  are  given  why  such  a  bank  would 
be  a  public  benefit,  chiefly  referring  to  the  promotion  of  trade 
and  industry.  Five  reasons  why  private  interests  will  be  pro 
moted,  among  which  are  :  "  The  trouble  of  counting  money  may 
be  much  avoided ;  the  usual  loss  by  receiving  counterfeit  and 
dipt  money  will  be  saved ;  many  fruitless  journeys  for  money 
will  be  saved,"  &c. 

"  The  credit  here  recommended  answers  all  the  ends  and  in 
tents  of  money,  for  it  will  pass  as  far  as  it  is  known,  and  our 
money  doth  no  more.  So  of  the  sealed  bags  of  money  in  the 
East  Indies,  which  pass  as  far  as  the  East  India  prince  hath 
credit.  This  credit  is  better  than  money,  for  it  will  pass  from 
man  to  man  without  any  damage  to  itself,  or  its  possessor ;  but 
money  occasions  great  loss  of  time,  as  well  as  trouble,  is  subject 
to  clipping,  counterfeiting  and  robbery,  and  is  oftentimes  the 
occasion  of  bloodshed  and  murder." 

"  But  to  further  satisfy  some  men  how  trade  can  be  driven, 
commodities  bought,  and  debts  paid,  without  money  or  specie, 
besides  the  indubitable  certainty  of  its  being  practised  in  the 
several  foreign  banks,  I  shall  form  an  example  or  two  of  the 
manner  and  conveniences  of  it.  As,  suppose  A.  oweth  B.  .£100, 
B.  the  like  to  C.,  C-  the  like  to  D.,  D.  the  like  to  E.,  and  E.  to 
F.,  and  F.  to  G.,  and  G.  to  H.,  and  II.  to  I.,  and  I.  to  A.,  which 
if  it  were  possible  for  them  all  to  know,  they  might  agree  upon  a 
meeting,  and  quit  each  other  by  rescounter"  (set-off),  "and  then 
all  are  satisfied,  without  one  farthing  being  paid  in  specie ;  where 
else,  for  want  of  this  meeting  (because  each  kno\vs  but  his  imme 
diate  debtor  and  creditor,  and  not  the  mediate),  or  for  want  of 
ready  money,  they  are  all  puzzled  with  debts  and  credits.  If  all 
these  debts  are  to  be  paid  by  the  circulation  of  X100  in  money, 
it  will  be  defeated,  if  any  one  in  the  chain  is  tempted  to  employ 
the  money  otherwise,  or  if  the  money  is  lost  or  stolen  on  its  pas 
sage  ;  neither  of  which  is  so  likely  to  happen  if  credit  be  em- 


NATIONAL    BANK,     1695.  349 

ployed,  which  would  quickly  and  surely  discharge  every  debt 
without  risk  or  loss." 

A  pamphlet  of  1683  thus  defines  a  Bank  of  Credit :  —  "It  is 
a  fund  of  goods,  or  assurances  of  lands,  &c.,  deposited  for  the 
raising  of  credit  thereupon,  under  the  greatest  security  of  con 
stitution  and  persons  that  can  be  devised ;  upon  which  fund  the 
depositor  is  furnished  with  bank  bills  of  credit  for  supply  of  his 
occasions,  which  will  be  as  useful  as  money  to  him."  The  bank 
bills  of  credit  were  to  be  issued  with  every  possible  security 
against  counterfeits,  the  precautions  being  set  forth. 

"Besides  which,  two  trustees  and  the  storekeeper  of  the  bank 
out  of  which  the  bills  shall  be  issued,  do  also  testifie  that  the 
value  of  the  said  bills  is  in  the  bank :  all  which  officers  are  upon 
their  oaths,  and  give  good  security  for  the  honest  discharge  of 
their  respective  employments,  so  that  no  6*ne  can  hope  to  make 
tender  of  a  false  or  counterfeit  bill,  or  one  unduly  come  to  his 
hands,  without  being  detected ;  in  which  respect  these  bills  are 
better  than  gold  or  silver,  besides  they  save  charges  in  carrying, 
and  time  in  telling  and  retelling  money  in  payments,  and  it  is 
easier  and  safer  travelling  with  them ;  nor  can  any  of  these  be 
fraudulently  issued  out  of  the  office  itself,  for  they  are  printed  in 
the  bank  house,  on  paper  made  on  purpose,"  &c. 

In  the  same  year,  1683,  the  Bank  of  Credit  is  described  and 
explained  in  a  pamphlet,  the  author  of  which  regards  the  subject 
from  the  same  point  of  view. 

In  1695,  appeared  "A  Proposal  for  a  National  Bank,  consist 
ing  of  land,  or  any  other  valuable  securities  or  depositums,  with 
a  grand  cash  for  the  return  of  money,"  by  Robert  Murray.  The 
author  dwells  at  length  on  the  great  advantages  of  the  Bank  of 
Amsterdam,  which  he  regards  as  "  incomparably  the  best  and 
greatest  in  the  world,  being  built  on  these  three  pillars  :  First, 
an  authentic  registry  of  all  receipts  and  payments  above  300 
guilders ;  secondly,  the  enjoining  the  payment  in  bank  of  all 
foreign  bills  of  exchange ;  and  thirdly,  the  city  and  government 
undertaking  the  security  of  all  money  paid  in  bank." 

In  urging  his  own  plan,  he  thus  speaks  of  the  advantages  of 
banks:  —  "The  great  convenience  attending  banks,  and  the 


350  ASGILL'S   OTHER  MONEY,   1696. 

difficulty  of  trade  where  banks  are  wanting,  show  their  necessity 
and  use  in  all  trading  countries.  To  avoid  the  trouble  of  telling, 
retelling,  carrying  and  recarrying,  and  the  danger  and  loss  of 
counterfeit  money,  men  are  under  a  sort  of  necessity  to  trust 
their  cash  in  the  hands  of  private  bankers  and  goldsmiths,  where 
public  banks  are  not  established ;  and  this  they  continue  to  do, 
notwithstanding  the  incredible  losses  often  sustained  by  frequent 
failures  and  insolvency  of  many,  to  the  ruin  of  those  that  trust 
them." 

The  author  declares  himself  the  advocate  of  public  banks 
under  the  control  of  public  authorities,  and  the  guarantee  of  the 
state.  "  The  bank  intended  by  this  proposal  is  to  be  under  the 
authority,  care,  inspection  and  control  of  the  public  magistracy, 
as  most  consonant  to  reason,  nature  and  political  economy." 
The  bank  was  to  consist  of  all  things  capable  of  being  a  fund  of 
credit,  as  land,  ground-rents,  &c.,  and  be  divided  into  10,000 
shares,  of  X100  each,  or  £1,000,000,  payable  in  ten  quarterly 
instalments ;  "  which  sum  will  be  found  a  stock  sufficient  to  cir 
culate  the  said  credit  from  time  to  time  issued :"  this  money  to 
be  deposited  in  the  treasury  of  the  City  of  London,  and  branches 
to  be  established  in  some  fifty  of  the  chief  towns  of  the  United 
Kingdom. 

The  business  proposed  for  this  bank  was  to  make  advances 
upon  bank,  foreign,  inland  bills,  exchequer  tallies,  upon  goods, 
upon  annuities,  and  public  taxes,  such  as  the  poor  rates,  to 
honest  persons  capable  of  employing  their  time  to  good  advan 
tage,  &c. 

In  the  same  year,  1696,  was  produced  "  Several  assertions 
proved  to  create  another  species  of  money  than  gold  and  silver," 
by  J.  Asgill.  The  first  assertion  is,  "that  there  is  a  necessity 
of  creating  another  kind  of  money ;"  the  third  is,  "  that  all  pro 
posals  for  making  bills  of  credit  current  money  directly,  by  act 
of  Parliament,  can  be  of  no  use;"  the  sixth  is,  "that  securities 
on  land  are  capable  of  all  the  quality  of  money,  and  therefore 
they  are  capable  of  being  made  money,  for  land  is  durable  and 
incorruptible,  the  earth  being  the  great  store-house  of  the  world, 
where  all  the  magazines  of  life  and  defence  are  kept  sweet  and 


LAND    CREDIT,     1698.  851 

safe.  Such  securities  are  divisible  into  larger  or  lesser  sums, 
and  capable  of  having  their  value  stamped  on  their  face,  and  of 
being  made  transferable  by  delivery." 

In  1698,  was  published  "  The  Constitution  of  the  Office  of 
Land  Credit,"  a  project  very  elaborately  developed,  by  Hugh 
Chamberling,  the  author  of  the  pamphlet  noticed  ante,  page 
345.  This  scheme  of  a  bank  was  brought  out  under  the  sanc 
tion  of  lofty  names ;  among  the  honorary  managers  are  four 
earls,  and  many  other  lords,  barons,  and  gentlemen  of  repute. 
It  is  stated  that  the  projector,  Chamberling,  had  devoted  thirty 
years  of  his  life  to  this  subject.  Some  of  his  positions  are  : 
u  That  lands  and  hands  are  the  material  and  efficient  causes  of 
all  true,  genuine  and  natural  riches  :  that  credit,  rightly  founded 
on  land,  must  evidently  be  more  secure  than  any  other  sort  of 
credit :  that  credit  having  all  essentials  of  the  usual  money,  and 
some  other  additional  advantages,  wants  nothing  but  a  coercion 
law,  enforcing  its  currency,  to  enable  it  to  assume  the  name  of 
money."  The  form  of  the  institution,  its  mode  of  government, 
the  plan  of  settling  the  credit  or  security  upon  lands,  are  all 
minutely  set  forth. 

These  notices  of  projects  and  schemes  of  banking  some  cen 
tury  and  a  half  old  are  given  to  the  reader  without  comment, 
the  object  being  merely  to  make  known  the  current  of  opinion 
at  that  time.  We  might  enlarge  the  list,  for  plans  of  banks  con 
tinued  to  appear  for  many  years  after  the  Bank  of  England  was 
chartered;  but  we  have,  perhaps,  more  than  satisfied  the  curiosity 
of  the  reader.  It  is  evident  that  great  misconceptions  prevailed 
as  to  the  power  and  real  nature  of  credit ;  this  is  manifest  in 'all 
these  plans.  The  subject  was  not  as  well  understood  as  it  was 
upon  the  continent.  It  is  not  for  many  years  after  the  date  of 
these  publications,  that  we  find  in  England  any  well-written 
account  of  the  continental  banks  or  credit  system. 


352  CHARTER    OF    THE    BANK. 


§  2.  The  Bank  of  England  chartered  in  1694  —  William  Patterson  the  pro 
jector —  Founded  on  a  loan  to  the  government  of  £1,200,000  at  eight  per 
cent. —  Opposition  and  objections — Commenced  business  1695 —  Powers 
indefinite — Bank-notes  —  Advances  to  government  —  Recoinage  —  Rate  of 
discount  —  Business  of  the  Bank  —  Use  of  deposits  —  Issue  of  bank  bills  — 
Employing  its  credit  —  Goldsmiths,  or  private  bankers,  robbed  by  Charles 
II.  —  Safety  of  deposits  in  Bank  of  England —  Use  of  deposits  by  depo 
sitors  and  the  Bank  —  Issue  of  bank  bills  payable  on  demand  —  Bills  of 
exchange  and  promissory  notes  on  time —  Convertibility — Theory  of  bank 
notes  not  substitutes  for  specie,  but  for  commercial  paper,  and  should  fluc 
tuate  with  this  paper,  and  not  with  coin  —  Concentration  of  payments  in 
London. 

The  Bank  of  England  owes  its  origin  to  one  of  the  most  fruit 
ful  schemers  of  the  latter  half  of  the  17th  century  —  the  same 
who  was  the  projector  of  the  Bank  of  Scotland,  and  the  chief 
promoter  of  the  disastrous  enterprise  undertaken  by  the  Darien 
Company,  of  planting  a  colony  on  the  Isthmus  of  Darien.1 

The  charter  of  this  bank  was  obtained  in  1694,  in  the  sixth 
year  of  William  and  Mary.  The  scheme,  which  was  due  to  the 
genius  of  William  Patterson,  had  been  on  foot  several  years,  and 
had  been  urged  on  the  government  with  great  perseverance.  It 
had  to  encounter,  like  other  schemes  for  banks,  opposition  from 
various  quarters.  The  tories,  who  were  in  opposition  to  the 
government,  opposed  it  as  likely  to  be  an  aid  to  the  administra 
tion  ;  the  goldsmiths,  private  bankers  and  usurers,  opposed 
it  as  likely  to  lower  the  rate  of  interest,  and  diminish  their  pro 
fits.  The  cautious  and  conservative  regarded  it  as  a  novelty, 
fraught  with  danger  to  the  country ;  and  they  prophesied  fearful 
results,  if  this  bank  were  chartered.  Patterson,  who  well  knew 
the  necessities  of  the  government,  then  engaged  in  war,  and 
frequently  obliged  to  pay  from  ten  to  forty  per  cent,  interest 
for  short  loans,  in  anticipation  of  the  public  revenues,  had  made 
it  a  prominent  part  of  his  plan  to  offer  the  public  treasury 
£1,200,000,  at  eight  per  cent,  interest. 

1  Five  vessels,  containing  this  Scotch  colony,  left  the  port  of  Leith  in 
July,  1698 ;  and  of  1200  persons  who  embarked,  30  only  remained  alive  to 
return  the  next  year. 


OBJECTIONS    TO     THE    BANK.  353 

This  was  all  that  secured  attention  to  his  project.  It  was 
strenuously  resisted,  both  in  Privy  Council  and  in  Parliament ; 
but  finally  triumphing  over  all  opposition,  the  charter  of  the 
Bank  of  England  was  issued  in  1694.  Previous  to  this  date, 
about  £500,000  of  the  stock  had  been  subscribed  through  the 
efforts  of  Michael  Godfrey,  one  of  the  most  active  promoters  of 
the  enterprise  in  London.  The  remaining  £700,000  was,  after 
due  notice  of  the  opening  of  the  books  under  the  charter,  sub 
scribed  in  ten  days. 

The  bank  was  not  allowed  to  go  into  operation  without 
the  persevering  and  determined  opposition  of  the  various  classes 
whose  interests  were  opposed  to  it.  There  was  no  evil  omen 
which  was  not  seized  upon,  and  no  objection  which  the  most  fer 
tile  imagination  could  conjure  up,  which  was  not  brought  to  bear 
against  it.  It  was  said  that  banks  could  only  prosper  in  repub* 
lies,  and  that,  if  attempted  under  a  monarchy,  the  monarch 
would  either  absorb  the  bank,  or  the  bank  would  absorb  the 
monarchy.  It  was  alleged  that  it  would  become  a  monopoly, 
and  engross  the  whole  money  of  the  kingdom ;  that  it  would  be 
subservient  to  the  government,  and  be  applied  to  the  worst  pur- 
pose£  of  arbitrary  power ;  that  it  would  not  assist,  but  weaken 
commerce,  by  withdrawing  money  from  trade  to  apply  to  stock 
jobbing  ;  that  it  would  produce  a  swarm  of  stock-jobbers  and 
brokers,  to  prey  upon  their  fellow-creatures,  and  corrupt  the 
morals  of  the  nation.  It  was  said,  in  one  of  the  pamphlets  of 
the  day  :  "  That  the  Bank  of  England  crept  into  the  world,  not 
being  in  any  votes"  (proposed  laws)  "by  that  name,  but  in  an  act 
granting  to  their  Majesties  several  duties  upon  tunnage  of  ships, 
beer,  ale,  &c.,  for  securing  certain  recompenses  to  such  as 
should  subscribe  £1,200,000  on  a  fund  of  eight  per  cent.,"  &c. 

The  writer  roundly  asserts  that  there  were  many  who,  if  they 
had  known  what  kind  of  bank  was  wrapped  up  in  that  bill,  would 
have  been  willing  to  lend  the  money  gratis  for  several  years,  to 
obtain  such  privileges. 

Another  opponent  admits  there  was  some  excuse  for  establish 
ing  the  bank,  but  none  for  continuing  it.  "  The  nation  had  been 
for  several  years  engaged  in  an  expensive,  hazardous  and  doubt- 
23 


354  THE    BANK- INIQUITY    BY    LAW. 

ful  war ;  the  government  had  drained  all  their  projects  to  raise 
the  necessary  supplies ;  but  the  credit  of  the  nation  sunk,  occa 
sioned  partly  by  the  divisions  of  Parliament,  the  deficiency  of 
the  funds,  and  most  unfortunately  by  the  baseness  of  our  coin, 
so  that  neither  our  money  nor  our  credit  would  pass  at  market." 
In  this  necessity,  the  author  admits  the  government  had  no 
choice  but  to  accept  the  alternative  of  a  bank.  "And  when  such 
an  enemy  was  at  our  doors,  it  was  too  favorable  an  opportunity 
for  such  a  fort  as  this  to  be  erected,  which,  though  then  designed 
for  our  defence,  serves  now  (1707)  to  overawe  us,  and  has  turned 
its  cannon  against  the  state  it  was  built  to  protect."  After  in 
dulging  in  this  strain  at  some  length,  he  proceeds :  "  We  are, 
God  be  thanked,  greatly  recovered  from  that  dangerous  crisis, 
our  credit  retrieved,  our  money  recoined,  great  part  of  our  debts 
paid,  and  almost  all  provided  for."  .  .  .  "We  crowd  more  to 
get  our  money  into  the  funds,  than  heretofore  to  get  it  out ;  and 
we  are  freed  from  any  necessity  of  supporting  the  wants  of  the 
government.  It  is,  therefore,  a  matter  of  prudence  whether  the 
bank  ought  to  be  continued  longer."2  To  this  continuance  the 
writer  opposes  all  his  powers  of  logic  and  abuse.  His  warnings 
and  denunciations  are  alike  terrible.  Of  the  two  evils,  he  thinks 
the  bank  far  more  dangerous  than  a  standing  army ;  that  neither 
should  be  allowed  in  time  of  peace ;  and  that  both  should  be  dis 
banded  as  soon  as  the  work  of  war  is  done.  He  concludes  by 
exhorting  those  who  have  the  power,  "if  they  would  have  their 
peace  and  liberties  safe,  by  putting  it  out  of  the  power  of  any  to 
molest  them,  and  by  keeping  their  elections  free,  not  to  repair 
this  fort  (the  Bank  of  England),  that  overawes  them,  and  by 
their  compassion  to  the  poor  tradesmen,  and  their  own  interest, 
not  to  establish  iniquity  by  law.'n 

This  may  serve  as  a  specimen  of  the  rhetoric  employed  against 
the  Bank  of  England  in  the  first  years  of  its  existence.  The 
opposition  which  began  with  its  birth  has  followed  it  down  to  the 
present  hour.  Every  recurrence  of  a  renewal  of  its  charter 

1  A  Short  View  of  the  Dangers  and  Mischiefs  of  the  Bank  of  England. 
London,  1707. 

2  He  gives  the  bank  no  credit  for  all  this. 


POWERS    OF     THE    BANK.  355 

brings  forth  a  host  of  objectors.  It  is  now,  however,  so  tho 
roughly  incorporated  with  the  body  politic  and  financial  system 
of  England,  that  its  continuance  is  not  only  necessary,  but  indis 
pensable.  To  touch  it  with  unskilful  hands  is  hazardous,  to 
shake  its  credit  is  ruinous  not  only  to  public,  but  to  private 
interests, 

On  the  1st  of  January,  1695,  the  bank  went  into  operation. 
Its  whole  capital,  when  paid  in,  and  as  paid  in,  was  to  be  lent  to 
the  government  as  a  special  loan,  the  interest  whereof  was  secured 
upon  certain  specified  taxes  mentioned  in  the  charter.  In  addi 
tion  to  the  interest  of  £96,000,  the  further  annual  sum  of  X4000 
per  annum  was  allowed  to  the  bank  for  the  management  of  the 
loan.  "  The  Governor  and  Company  of  the  Bank  of  England  had 
full  authority  granted  them,  in  whatever  concerned  "borrowing  or 
receiving  moneys,  and  giving  security  for  the  same  under  their  seal ; 
in  dealing  in  bills  of  exchange,  buying  or  selling  bullion,  gold  or 
silver ;  selling  any  goods,  wares  or  merchandise  deposited  with 
them  for  money  lent  or  advanced  on  them,  and  not  redeemed  at 
the  time  agreed,  or  within  three  months  after ;  in  selling  such 
goods  as  may  be  the  produce  of  lands  purchased  by  the  bank ; 
in  lending  or  advancing  any  of  the  moneys  of  the  corporation  ; 
and  in  taking  pawns,  or  other  securities,  for  the  same."  From 
this,  it  will  be  apparent  that  the' banking  business  of  the  corpo 
ration  was  not  very  particularly  described  or  specified.  The 
main  fact  was,  that  the  subscribers  to  a  public  loan  of  XI, 200, 000 
were  incorporated  as  a  bank,  and  left  to  shape  their  business, 
under  these  general  powers,  as  their  interests  and  the  demands 
of  their  customers  might  dictate.  Their  first  object,  no  doubt, 
was  to  invite  deposits  ;  and  certainly  the  security  of  such  a  large 
amount  of  loan  to  the  government  was  superior  to  any  ever  be 
fore  offered  to  depositors  in  England. 

The  act  of  incorporation  conferred  no  special  power  of  issuing 
bank-notes,  or  other  paper,  to  circulate  as  money ;  but  this 
power  seems  to  have  been  regarded  as  incident  to  the  corporate 
powers  conferred  in  the  charter.  One  of  the  first  notices  published 
by  the  bank,  dated  llth  February,  1695,  was  to  the  effect  that 
three  cashiers  named  in  the  notice  were  the  only  persons  author- 


856  STATE     OF    THE    BANK    IN     1096. 

izcd  by  the  bank  to  give  notes  on  behalf  of  the  company  either 
for  payment  of  money  or  bills ;  that  is,  either  of  the  three 
cashiers,  and  no  other  person,  were  authorized  to  sign  and  issue 
notes,  for  which  the  bank  was  to  be  accountable.  We  find  very 
few  particulars  in  regard  to  the  earliest  issues  of  the  bank.  No 
notes  were  at  first  issued  under  £20.  When  the  "infant"  bank, 
in  1696,  encountered  the  difficulties  of  the  national  recoinage,  it 
for  a  time  suspended  payments,  and,  as  a  measure  of  relief, 
issued  bills  under  seal,  bearing  six  per  cent,  interest,  with  which 
they  redeemed  the  cashiers'  notes,  which  were  payable  on  de 
mand  without  interest. 

That  the  bank  issued  these  sealed  bills  and  the  cashiers'  notes 
freely,  is  evident  from  a  statement  furnished  to  the  House  of 
Commons,  dated  10th  November,  1696,  by  which  it  appeared 
that  there  was  outstanding  sealed  bills,  ,£893,800,  cashiers' 
notes,  £764,196.  The  cash  then  on  hand,  £35,664,  was  all 
they  had  to  meet  £1,657,996  of  sealed  bills  and  notes.  The 
advances  made  by  the  bank  had  been  chiefly  to  the  govern 
ment,  only  £231,000  appearing  to  have  been  lent  to  individuals. 
The  government  being  the  chief  debtor,  was  bound  to  afford  the 
necessary  relief  in  the  emergency.  This  was  done  by  allowing 
the  bank  to  increase  its  stock,  in  payment  of  which  increase  a 
portion  of  the  outstanding  liabilities  of  the  bank  were  absorbed. 
So  great  was  the  financial  derangement  growing  out  of  the 
recoinage  then  in  progress,  of  the  embarrassments  of  the  govern 
ment,  and  the  over-issues  of  the  bank,  that  the  obligations  of 
the  public  treasury  were  at  a  discount  of  forty  or  fifiy  per  cent., 
and  bank-notes  at  twelve  to  twenty  per  cent.  It  is  evident  that 
the  notes  of  the  bank  had  for  a  time  been  received  with  great 
favor,  or  so  large  an  amount  as  £1,657,996  could  not  have  been 
issued  in  less  than  two  years. 

The  government  had  determined  upon  recoining  in  full  weight 
a  silver  currency  depreciated  25  per  cent,  by  wear  and  clipping  : 
the  bank  continued  to  issue  its  bills  for  this  light  coin,  though 
obliged  to  wait  the  movement  of  the  mint  for  the  new  coins.1 

1  Ante,  pp.  80  to  85. 


RECOVERY    FROM    FIRST    SUSPENSION.          357 

The  old  coins  were,  by  proclamation,  declared  uncurrent,  and 
the  bank  could  not  obtain  new  coins  from  the  mint  fast  enough 
to  meet  the  demands  of  a  community  greatly  in  need  of  cur 
rency.  This  contributed  much  to  increase  the  issue  of  bank 
notes. 

The  measure  of  the  governnienf  brought  an  addition  to  the 
stock  of  about  £1.000,000,  and  reduced  the  liabilities  of  the 
bank  to  the  same  amount.  This,  with  an  act  of  Parliament, 
containing  many  provisions  favorable  to  the  bank,  raised  the 
stock  in  a  few  months  to  112  per  cent.,  greatly  enhanced  the 
price  of  the  government  securities,  and  gave  the  bank-notes  free 
currency.  The  bank  recovered  from  its  first  suspension,  by  this 
aid  of  the  government,  in  a  very  short  time.  It  must  be  noted, 
however,  that  the  aid  rendered  by  the  bank  to  the  government 
was  even  more  important  and  substantial  than  that  rendered  by 
the  latter  to  the  bank. 

The  charter  was  not  only  silent  with  reference  to  the  issue  of 
notes,  but  also  in  regard  to  the  payment  of  specie.  That  very 
important  matter  was  left  to  be  regulated  by  the  general  laws 
of  the  country.  The  corporate  body  could  issue  notes,  and 
having  issued  them,  it  was  bound  to  pay  them  in  lawful  money, 
as  other  persons  and  bodies  corporate  would  be  bound.  No 
general  alarm  seems  to  have  been  felt  on  the  occasion  of  this 
first  suspension,  and  the  obligations  of  the  bank  seem  to  have 
been  regarded  as  safe,  though  not  convertible  instantaneously 
into  money. 

"We  have  already  remarked  that  the  bank  was,  under  the 
general  terms  of  its  charter,  left  to  shape  its  policy  according  to 
the  course  of  business  and  the  dictates  of  its  own  interests.  To 
induce  deposits,  the  bank  early  made  a  distinction  in  the  rate 
of  discount  between  its  regular  customers  and  all  other  appli 
cants,  of  from  two  and  a  half  to  three  per  cent.,  the  highest  rate 
being  six  per  cent.  The  first  error  of  the  bank,  that  of  lending 
too  freely  to  the  government,  had  the  result,  in  the  end,  of  esta 
blishing  its  credit  the  more  firmly,  for  it  secured  thereby  effec 
tually  the  continued  and  efficient  support  of  the  national  trea 
sury  ;  and  being  thus  strongly  established,  it  very  rapidly  secured 


3-58  THREE    MODES    OF    BUSINESS. 

the  confidence  of  men  of  business  and  wealth.  Although  spe 
cially  authorized  to  receive  merchandise  and  personal  property 
in  security  for  loans,  very  few  of  its  operations  took  that  direc 
tion;  its  business  consisted  mainly  in  dealing  in  bills  of  ex 
change,  and  other  commercial  paper,  and  in  receiving  deposits. 
The  bank  having  nothing  in  its  vaults  at  the  outset  but  certi 
ficates  of  public  debt,  to  the  extent  to  which  the  £1,200,000  had 
been  paid  up,  had  only  three  modes  of  carrying  on  banking 
business  open  to  it. 

1.  To  lend  or  employ  the  money  deposited  by  its  customers, 
to  the  amount  it  might  be  safe  or  expedient  to  lend  or  use  money 
which  was  payable  to  depositors  on  demand. 

2.  To  issue  bank-notes  for  circulation  as  currency,  or  bonds 
bearing  interest,  to  be  taken  by  those  who  desired  such  security 
for  investments ;  and  to  employ  the  bank-notes,  and  the  money 
received  for  bonds,  in  the  purchase  of  promissory  notes  and  bills 
of  exchange  at  such  rates  as  would  leave  a  profit  to  the  bank. 

3.  To  employ  its  credit,  which  soon  attained  a  high  grade,  in 
discounting  bills  of  exchange  and  promissory  notes  for  its  cus 
tomers,  giving  them  merely  a  credit  in  account  on  the  books  of 
the  bank  for  the  proceeds  of  the  paper  discounted,  and  allowing 
the  parties  obtaining  such  credits  to  transfer  them,  in  sums  to 
suit  their  convenience,  to  other  persons. 

The  bank,  notwithstanding  the  check  it  received  in  the  second 
year  of  its  existence,  rose  rapidly  in  importance  and  in  business. 
It  blended  at  once,  in  its  operations,  all  the  modes  of  business 
above  specified :  but  as  these  modes  of  banking  are  essentially 
distinct  operations,  even  when  carried  on  by  the  same  bank,  we 
shall  consider  them  separately ;  the  more  so,  as  the  confusion 
of  terms  and  ideas  resulting  from  these  blended  processes  of  the 
bank  has,  from  that  time  to  the  present,  produced  a  degree  of 
confusion  in  men's  minds,  upon  the  subject  of  banks  of  circula 
tion,  very  unfavorable  to  clear  perceptions  on  the  subjects  of 
money  and  banking. 

The  business  of  receiving,  holding  and  paying  out  deposits  is 
probably  as  old  as  the  use  of  money.  It  has  assumed  many  dif 
ferent  forms  in  different  ages,  and  among  different  people ;  but 


ANTIQUITY    OF    BANK    DEPOSITS.  359 

the  business  has  existed  at  all  times,  and  in  all  nations,  where 
gold  and  silver  money  were  employed.  It  was  always,  and  is 
yet,  unavoidable.  A  large  portion  of  those  who  have  occasion 
to  receive  money,  could  not  and  cannot  be  judges  of  the  genuine 
ness  of  coin  or  bullion  ;  they  could  not  weigh  and  test  it  with 
sufficient  accuracy  ;  this,  of  course,  gave  rise  to  a  class  of  men 
skilled  in  the  precious  metals,  and  with  them  these  metals  were 
deposited  for  safe-keeping,  and  convenience  of  paying.  In  all 
ages,  the  safe-keeping  of  the  precious  metals  was  one  of  the  most 
difficult  exigencies  to  provide  for,  and  one  which  created  unceas 
ing  anxiety.  We  find  mention  of  bankers  in  the  history  of  every 
ancient  civilized  people,  who  exercised  their  functions  very  much 
as  they  do  in  China  at  this  day.  Our  Saviour,  in  one  of  his 
parables,  makes  the  lord  of  the  unfaithful  servant  say:  "Where 
fore,  then,  gavest  not  thou  thy  money  into  the  bank,  that  at  my 
coming  I  might  have  required  mine  own  with  usury."1  From 
this,  it  appears  that  '  the  bankers  of  that  day  were  in  the  habit 
of  paying  interest  on  deposits. 

The  bankers  of  England,  previous  to  the  charter  of  the  Bank 
of  England,  and  to  a  large  extent  for  a  long  time  afterward, 
were  the  goldsmiths.  Their  business  made  them  adepts  in  bullion 
and  money,  and  required  safe  depositories.  Very  large  sums 
were  entrusted  to  them  by  the  nobility,  gentry,  and  business 
men  of  England.2  But  as  these  private  bankers  had  been,  on 
two  occasions,  robbed  by  the  monarchs  of  England,  some  dis 
trust  of  their  ability  to  protect  money  committed  to  them  natu 
rally  found  a  place  in  the  minds  of  depositors.  The  Bank  of 
England  took,  from  the  beginning,  the  position  of  a  great  and 
powerful  corporation.  It  commanded  at  once  so  high  a  degree 
of  confidence,  as  to  secure  large  deposits.  One  of  its  first  by- 


2  In  the  reign  of  Charles  the  Second,  when  the  money  of  the  bankers,  or 
goldsmiths,  was  seized  in  the  exchequer,  where  it  had  been  deposited  for 
.safety,  the  amount  was  £1,328,526  —  a  great  sum  for  those  days.  Charles 
the  First  had  seized  £200,000,  deposited  in  the  mint,  in  his  time.  One 
of  the  bankers  robbed  by  Charles  the  Second  had  £416,724  taken  from 
him. 


360  LENDING    DEPOSITS. 

laws  assisted  in  strengthening  this  confidence,  by  requiring  that 
the  cash  of  the  corporation  should  "be  carefully  kept  under 
three  or  more  locks,  the  keys  whereof  shall  be  kept  by  such  three 
or  more  of  the  Governor,  Deputy  Governor  and  Directors  as  the 
said  Court  of  Directors  shall  from  time  to  time  empower  to  keep 
the  same,  each  of  said  persons  keeping  one  of  said  keys." 

The  keeping  of  money  for  a  large  number  of  persons,  who 
only  draw  it  as  their  wants  and  occasions  require,  leaves  a  con 
siderable  proportion  in  the  hands  of  the  banker,  subject  to  his 
disposal,  as  not  at  all  likely  to  be  called  for  by  the  owners. 
This  the  banker  may  lend  upon  good  securities,  in  the  hope  that 
it  will  not  be  required,  or  that,  if  the  whole  or  a  part  should  be 
demanded,  he  will  be  able,  by  means  of  the  same  securities,  to 
raise  the  amount  demanded.  The  private  bankers  of  England, 
and  indeed  of  all  Europe,  had  realized  large  profits  from  this 
allowed  trading  in  money  not  their  own.  It  was,  however,  not 
a  very  unusual  occurrence  that,  in  times  of-  alarm  and  commer 
cial  panic,  a  run  on  such  bankers  took  place,  and  their  discredit 
and  ruin  followed  upon  their  inability  to  meet  the  demands  of 
customers ;  for  they  found,  by  experience,  that  the  season  of 
alarm  and  distrust  which  produced  the  demand  for  deposits,  was 
one  in  which  they  could  not  realize  upon  the  securities  taken  for 
loans.  The  Bank  of  England  could  not,  of  course,  be  exempt 
from  this  difficulty.  It  must  always  have  been,  and  must  always 
be,  a  business  of  no  little  hazard,  to  lend  the  money  of  parties 
entitled  to  repayment  on  demand. 

It  is  urged  by  some,  that  all  business  transactions  in  which 
money  is  involved  should  be  for  money  in  hand ;  but  even  if  all 
sales  of  property  were  for  cash,  which  never  has  been  the  case 
in  any  civilized  country,  and  never  can  be,  yet  many  transac 
tions  in  credit  would  take  place.  All  deposits  with  bankers  are 
credits  given  to  the  bank ;  all  loans  of  money  by  the  bank  are 
transactions  of  credit,  as  well  as  all  loans  from  .one  individual  to 
another.  There  never  was  a  civilized  country  in  which  such 
transactions  did  not  take  place.  Of  course,  periods  of  alarm, 
panic  or  commercial  distrust  must  occur,  from  one  cause  or 
another ;  and  at  such  times,  neither  banks  nor  individuals  can 


CIRCULATION    OF    DEPOSITS.  361 

immediately  recall  the  money  they  have  lent  or  deposited.  The 
history  of  the  Bank  of  England  furnishes  many  such  occasions ; 
but  as  the  bank  enjoyed  the  full  confidence  and  support  of  the 
government,  it  was  ever  able  to  bear  the  pressure  of  such  occa 
sions  with  less  damage  than  any  mere  private  bankers.  No  depo 
sitor  in  the  Bank  of  England  has,  during  its  existence  of  one 
hundred  and  sixty  years,  ever  lost  his  deposit.  During  that 
time,  immense  sums  deposited  with  private  bankers,  and  inferior 
establishments,  have  been  totally  lost.  It  cannot  be  doubted 
that  the  bank,  despite  the  losses  incident  to  lending  money,  to 
the  temptation  of  employing  too  freely  the  money  of  its  cus 
tomers,  and  the  sacrifices  involved  in  replacing  money  upon  occa 
sions  of  panic,  has  realized  large  profits  from  this  branch  of  its 
business,  which  has  been  increasing  in  magnitude  and  advantage 
from  the  institution  of  the  bank  until  the  present  time. 

We  have  thus  presented  deposits  in  the  single  view  of  their 
safety,  and  the  advantage  of  the  bank  in  lending  such  propor 
tion  of  them  as  it  may  be  expedient  to  employ  in  that  way. 
And  we  have  only  referred  to  deposits  of  actual  money  —  that 
is,  of  coin  or  bullion.  Other  values  which  are  included  in  depo 
sits,  such  as  bank-notes  and  bank  credits,  will  be  considered 
hereafter.  Our  object  has  been  to  separate  the  various  functions 
and  processes  of  the  business  of  the  bank,  and  to  give  the  reader 
a  distinct  view  of  each  process,  without  which  he  cannot  under 
stand  the  whole  when  combined. 

There  is,  however,  an  aspect  of  deposits  of  money,  which 
may  be  deemed  equally  as  important  to  the  bank,  and  more  so 
to  the  commercial  public,  than  that  which  we  have  presented. 
The  deposits  would  not  reach  nearly  so  large  an  amount,  if  they 
were  expected  to  lie  in  the  bank  useless  to  the  depositor. 
Money  is  deposited  not  only  for  safe-keeping,  but  for  actual  and 
rapid  use.  The  bank  allows  the  deposits  to  be  transferred  from 
one  account  to  another,  in  as  rapid  succession  as  the  convenience 
of  the  parties  may  dictate.  The  circulation  of  deposits  may,  by 
this  means,  be  vastly  beyond  any  possible  actual  movement  of 
money  by  counting  and  delivery  out  of  bank.  Without  any 
trammels  of  counting,  weighing,  scrutinizing  and  assaying,  such 


362        EFFICACY    OF    CIRCULATING    DEPOSITS. 

as  must  take  place  with  coins  and  bullion,  these,  when  once  depo 
sited,  may  be  transferred  by  check  on  the  books  of  the  bank  a 
hundred  times  daily,  if  needful.  This  may  give  trouble  to  the 
bank,  which  must  have  clerks  enough  to  make  these  transfers, 
and  keep  the  accounts  of  all  correctly.  The  operation  of  these 
transfers  takes  nothing  from  the  bank ;  the  money  remains ;  the 
ownership  only  changes.  The  great  facility,  safety  and  rapidity 
of  this  mode  of  payment  attracts  large  sums,  because  the  depo 
sitors  have,  in  much  the  largest  number  of  cases,  a  far  more 
efficient  use  of  their  money  as  it  lies  in  bank,  than  they  would 
have  if  it  were  in  their  own  hands.  This  use  of  deposits  so 
swells  the  amount  deposited  in  bank,  as  to  place  a  much  larger 
sum  at  the  disposal  of  the  bank  for  its  own  profit.  Thus  the 
bank  could  lend  a  certain  proportion  of  its  deposits,  and  receive 
interest  therefor,  at  the  same  time  that  the  owners  of  the  depo 
sits  were  making  the  utmost  use  of  their  money  which  could  be 
made  under  any  circumstances. 

This  mode  of  payment  offered  to  its  customers  by  the  Bank 
of  England  was  the  same  which  had  been  enjoyed,  to  some  ex 
tent,  on  the  books  of  the  private  bankers ;  but  the  superior 
credit  of  the  bank,  and  the  far  larger  number  of  its  depositors, 
gave  much  greater  effect  to  this  rapid  mode  of  payment  than 
could  take  place  .between  the  same  parties  as  depositors  with 
different  private  bankers.  This  advantage  gradually  attracted 
to  the  bank  a  large  portion  of  the  money  of  the  country,  which 
became  available  for  a  mode  of  payment,  the  most  effective  of 
which  it  was  susceptible.  The  money  deposited  was  thus  made 
to  perform  the  same  duty,  in  proportion  to  the  amount,  as  that 
which  was  shut  up  in  the  Banks  of  Amsterdam  and  Hamburg, 
with  this  advantage  to  the  depositor,  that  he  could  withdraw 
his  deposit  at  pleasure.  The  bank  deposits  became  the  most 
popular  and  safe  mode  of  effecting  the  larger  payments  of  com 
merce,  foreign  and  domestic,  and  they  absorbed  the  amount 
needful  for  that  purpose.  It  is  obvious  that,  with  the  compara 
tively  rapid  circulation  of  deposits,  a  much  less  amount  would  be 
required  for  these  payments,  than  if  coins  had  to  be  employed 
for  that  purpose.  The  deposit  system  of  payments  was  one  not 


THE    ISSUE    OF    BANK-NOTES.  863 

only  of  great  efficiency,  but  of  great  economy ;  it  saved  proba 
bly  three-fourths  of  the  money  which  would  be  required  to  make 
the  same  amount  of  payments  by  the  actual  counting  and 
delivery  of  coins;  but,  in  fact,  payments  could  be  made  ten 
times  faster  by  deposits  than  by  coins.  The  money  thus  econo 
mized  was  lent  by  the  bank  to  its  customers,  who  would  be,  in  a 
large  degree,  the  very  same  who  made  the  deposits.  The  depo 
sitors  had,  then,  not  only  more  effective  use  of  their  money  as  a 
deposit,  but  their  united  deposits  placed  at  the  disposal  of  the 
bank  a  large  sum  to  be  lent  to  them  for  their  accommodation. 

Another  mode  of  business  open  to  the  Bank  of  England  was 
the  issue  of  bank-notes,  or  other  securities  of  a  similar  nature, 
for  which  they  might  find  a  demand.  Bank-notes,  properly 
speaking,  were  unknown  in  England  at  the  origin  of  the  bank. 
The  notes  of  the  goldsmiths  were  regarded  in  no  other  light  than 
that  of  promissory  notes  of  individuals.  They  never  reached 
that  full  currency  as  money  to  which  bank-notes  have  since 
attained.  The  notes  of  the  Bank  of  England  were  for  a  long 
time,  by  writers  and  in  public  documents,  called  promissory 
notes  payable  on  demand,  to  distinguish  them  from  the  usual 
business  notes  drawn  upon  time.  As  the  Bank  of  England  was 
the  first  to  issue  bank-notes,  now  technically  so  called,  in  that 
country,  it  may  assist  our  perceptions  of  the  true  nature  and 
functions  of  banks,  if  we  regard  them  from  the  point  of  view 
taken  by  the  bank,  when  it  first  issued  a  form  of  security  which 
has  since  occupied  so  much  of  the  time  and  attention  of  the 
commercial  and  political  world,  and  about  which  opinions  have 
been  so  divided. 

The  bank  was  authorized  by  its  charter  to  deal  in  bills  of  ex 
change,  and  as  bills  were  much  used  in  England  in  the  domestic, 
as  well  as  in  the  foreign,  trade,  they  were  of  course  early  offered 
to  the  bank.  It  would  be  apparent  to  the  bank,  that  the  amount 
of  foreign  and  domestic  bills  was  far  greater  than  the  money 
and  bullion  in  the  country.  The  bills  of  exchange,  therefore, 
offered  to  the  bank  a  vastly  larger  opening  for  business  than 
any  possible  operations  in  money  or  bullion.  It  became  an  in 
teresting  point  to  decide  in  what  way  the  bank  could  deal  in 


364        BANK-NOTES    AN    EXCHANGE    OF    PAPER. 

bills  of  exchange,  foreign  and  domestic,  and  it  may  be  added 
promissory  notes,  with  advantage  to  itself  and  the  public.  The 
subject,  as  thus  presented  to  them,  was  much  simpler  than  it  is 
regarded  now,  when  it  involves  so  many  complications. 

Bills  of  exchange  and  promissory  notes  had  then,  as  now, 
some  time  to  run  before  maturity,  say  an  average  of  three 
months.  During  that  time,  these  securities  were  of  no  use  to 
the  holders,  unless  they  could  transfer  them  in  payment  of  debts, 
or  in  the  purchase  of  property.  This  advantage  would  be  rare, 
for  the  amounts  would  be  inconvenient,  and  the  exact  standing 
of  the  parties  not  always  known.  But  as  these  securities,  among 
men  of  business,  make  a  very  large  item  of  their  posses 
sions,  they  would  naturally  be  used  in  obtaining  loans ;  and 
so  far  as  the  bank  had  money  to  lend,  it  would  not  only  look 
with  favor  upon  such  securities,  but  would  incline  to  carry  its 
dealings  in  them  far  beyond  the  amount  of  any  money  it  could 
command.  The  obvious  suggestion  would  be,  to  give  the  holders 
of  these  securities  of  such  inconvenient  amounts,  and  limited 
credit,  the  notes,  in  small  amounts  or  denominations,  of  the  bank 
itself,  payable  at  the  same  time.  The  bank  would  deem  it 
quite  safe  to  exchange  its  own  promissory  notes  for  approved 
notes  or  acceptances  of  individuals,  both  payable  on  the  same 
day ;  so  that,  on  these  transactions,  the  amount  payable  by  the 
bank  each  day  would  be  the  same  which  was  payable  to  the  bank. 
For  this  exchange  of  notes,  or  securities,  the  bank  would  of 
course  exact  a  compensation  in  the  shape  of  commission,  dis 
count  or  interest.  The  advantage  to  the  customer  of  the  bank 
would  be  obvious ;  he  would  receive,  for  instance,  in  place  of  a 
bill  of  exchange  or  promissory  note  for  .£180,  nine  notes  of  the 
bank  for  <£20,  each  of  which  would  be  gladly  received  by  all 
persons  in  the  payment  of  debts  or  goods.  The  inducements  to 
such  a  business  would  be  quite  sufficient  to  secure  its  continu 
ance  on  both  sides. 

But  the  Bank  of  England,  on  the  suggestion  of  certain  bold 
and  ingenious  financiers  of  that  day,  decided  to  go  a  long  step 
farther,  and  so  to  increase  the  inducements  on  its  side  as  to 
insure  a  large  business  and  great  favor  with  the  people.  It  was 


BANK-NOTES     PAYABLE     ON     DEMAND.  365 

urged  upon  the  bank,  that  it  might  not  only  issue  its  notes  in 
small -denominations,  in  exchange  for  individual  commercial  paper 
having  some  time  to  run,  but  that  such  notes  might  safely  be 
made  payable  to  the  holders,  or  whoever  might  present  them,  on 
demand.  It  was  alleged,  in  justification  of  this  bold  idea,  that 
these  small  notes  issued  by  the  bank  would  pass  into  circulation 
like  money,  and  thus  be  dispersed  over  the  kingdom ;  that  they 
would  furnish  an  immense  facility  in  business,  and  become 
almost  indispensable  in  the  transactions  of  domestic  trade  ;  that 
they  could  not,  and  would  not,  therefore,  be  returned  suddenly 
and  in  large  quantities  upon  the  bank.  It  was  further  urged  that 
it  would  be  a  very  great  convenience  to  the  holders  of  these,  if 
an  occasional  want  of  money  or  coins  could  be  supplied  at  once 
by  presentation  of  these  notes  at  the  bank ;  that  it  would  be 
easy  for  the  bank  to  supply  these  occasional  wants,  and  that  the 
doing  so  would  give  the  notes  a  currency  like  money,  and  a  favor 
with  the  public  far  beyond  any  previous  anticipations. 

Upon  such  considerations,  the  bank  decided  to  issue  notes 
payable  to  bearer  on  demand,  in  exchange  for  individual 
paper  payable  at  a  future  day.  The  bank  thus  undertook  to 
perform  an  impossibility,  in  the  hope  that  it  would  not  be  called 
upon  to  redeem  the  promise,  or  make  the  attempt.  What  the 
bank  could  do  was  to  give  its  own  notes,  of  convenient  denomi 
nations  for  circulation,  in  exchange  for  individual  paper,  and 
payable  at  the  same  time ;  and  in  doing  this  alone,  the  bank 
could  have  rendered  a  great  service  to  the  public  with  small  risk. 
The  bank  had  not  the  money,  and  could  not,  therefore,  purchase 
the  paper  offered ;  the  notes  offered  by  the  bank  were  not  money, 
though  a  much  better  substitute  for  money  than  the  notes  of  indi 
viduals,  which  could  only  circulate  to  a  very  limited  extent  as  a 
medium  of  payment.  The  bank  issued  notes  payable  to  bearer, 
without  endorsement,  and  this  certainly  added  to  the  facility 
and  convenience  of  their  passing  rapidly  from  hand  to  hand  as 
a  currency.  It  departed  from  sound  principles,  when  it  made 
these  notes  payable  on  demand  in  gold  or  silver ;  for  it  must  be 
contrary  to  sound  principles,  to  undertake  to  do  what  cannot  be 
done.  The  bank-notes  were  nothing  more,  and  should  not  have 


366  THE    FUNCTIONS    OF    BANK-NOTES. 

been  held  up  to  the  public  as  anything  more,  than  the  mere  pro 
missory  notes  of  the  bank,  convenient  in  form  for  circulation 
among  all  those  who  chose  to  take  them,  not  as  money,  but  as 
promises  to  pay  money.  The  promise  should  have  been  only 
such  as  the  bank  could  perform.  Strictly  speaking,  the  bank 
could  only  pay  in  coin  when  it  received  in  coin.  It  could  exact 
payment  in  coin  for  the  note  received  of  every  individual  only 
when  the  note  matured,  and  not  before.  The  accommodation 
between  the  bank  and  its  customers  was  mutual  in  this  exchange 
of  notes ;  the  bank  received  a  profit,  and  the  customer  received 
the  bank-notes  a  better  medium  of  payment,  one  which  would  be 
received  out  of  the  bank,  as  well  as  in  it,  in  payment  of  debts, 
or  in  the  making  of  purchases.  But  it  should  never  have  been 
imagined  for  a  moment,  that  by  this  process  between  the  bank 
and  its  customers  they  manufactured  money.  If  the  notes 
issued  by  the  bank  had  been  payable  in  specie  only  upon  the 
day  when  the  paper  taken  by  the  bank  wras  payable,  then  the 
bank  would  receive  every  day  from  the  public  as  much  as  the 
public  could  demand  from  the  bank.  The  bank-notes  would,  in 
this  case,  have  served  every  legitimate  purpose  which  such  an 
instrument  could  serve.  If  all  the  business-paper  of  England 
had  been  thus  exchanged  for  notes  of  the  Bank  of  England,  then 
all  this  business-paper  could  have  been  paid  off  and  discharged 
by  these  bank-notes.  This  surely  was  an  advantage  in  itself, 
and  an  economy  of  money  very  desirable  to  be  achieved.  Nothing 
more  than  this  should  ever  have  been  expected  of  bank-notes. 

It  is  true  that  bank-notes  might  have  been  issued  on  the  basis 
of  specie  alone ;  in  that  case,  the  specie  should  have  been  kept 
ready  for  their  redemption,  pound  for  pound.  But  when  the 
notes  of  a  bank  are  issued  in  exchange  for  the  notes  of  indi 
viduals,  they  should  in  strictness  be  payable  in  gold  or  silver 
only  when  the  notes  of  the  individual  are  so  payable.  The  bank 
would  then  either  receive  its  own  notes  back,  or  something  that 
would  pay  them  when  presented. 

If  we  suppose  the  Bank  of  England  to  have  received  from  its 
customers  individual  notes  and  acceptances  to  the  amount  of 
,£5,000,000,  at  the  rate  of  six  per  cent,  discount,  and  having  an 


SECURITY    AGAINST    ABUSES.  867 

average  of  two  months  to  run,  it  would  then  have  issued  its  own 
notes  to  the  amount  of  £4,950,000.  The  bank  would  thus  have 
furnished  to  the  many  debtors  whose  paper  it  held  for  £5,000,000, 
a  perfectly  good  paper  currency,  in  which  payment  of  this  sum 
could  be  made.  And  these  debtors  would  only  have  to  purchase 
from  the  public  this  £4,950,000  of  bank-notes,  and  carry  with 
them  £50,000  in  money,  to  pay  off  the  whole  indebtedness  of 
£5,000,000,  and  be  freed  from  their  liabilities.  Surely,  bank 
notes  might  be  employed  in  this  way,  without  calling  them 
money ;  and  every  needful  security  might  be  required  of  a  bank 
against  the  abuse  of  this  power  of  issuing  bank-notes,  without 
attempting  to  make  them  money. 

In  the  case  supposed  above,  the  bank,  if  its  issues  were  pay 
able  on  demand,  would  be  under  an  obligation  to  pay  £4,950,000 
in  coin,  on  presentation  of  its  notes.  But  the  holders  of  these 
notes  had  not  given  coin  for  them,  and  the  notes  for  which  they 
were  <nven  would  not  be  due  for  an  average  of  two  months.  The 

O  O 

debtors  of  the  bank  needed  but  one  per  cent,  of  the  amount  in 
money,  and  the  public  needed  only  that  the  bank-notes  would 
pay  all  their  debts,  and  make  all  their  purchases.  There  is  no 
conceivable  use  of  making  bank-notes  payable  on  demand,  but 
as  a  check  on  over-issues  and  abuses.  The  experience  of  a  cen 
tury  and  a  half  in  Europe  proves  that  it  is  no  adequate  check. 
Other  checks  and  securities,  far  more  safe  and  reliable,  have 
been  applied,  and  not  nearly  so  burdensome,  to  banks.  The 
Bank  of  England,  in  the  first  instance,  really  offered  the  security 
of  the  public  debt ;  and  during  its  whole  history  it  could  always 
have  given,  and  could  now  give,  that  security  for  its  whole  cir 
culation,  if  it  were  only  compelled  to  pay  its  notes  in  specie, 
pari  passu,  with  the  payment  of  the  individual  paper  held  by 
the  bank.  Every  really  useful  function  of  a  bank-note  can  be 
as  fully  performed  by  one  payable  in  specie  at  two,  three  or  four 
months,  as  if  payable  on  demand.  It  is  certainly,  upon  occasion, 
a  convenience  to  be  able  to  ask  for  and  receive  specie  on  demand ; 
but  it  is  a  convenience  the  public  can  have  no  right  to  expect, 
as  it  involves  an  impossibility.  It  would  be  a  great  convenience 
for  merchants,  if  they  could  open  their  port-folios  at  any  time, 


368        PROPORTION    OF    COIN    TO      NOTES    ISSUED. 

take  out  notes  and  acceptances,  and  make  demand  for  the 
amount  in  specie ;  but  it  is  an  advantage  impossible  to  be 
accorded.  It  is  an  advantage,  in  the  case  of  the  bank,  only 
maintained  for  the  public  at  a  cost  ten  times  greater  than  it  is 
worth.  This  advantage,  which  the  Bank  of  England  only  offered, 
in  the  first  instance,  to  attract  business,  and  to  give  currency  to 
their  notes,  has  been  paid  for  since,  by  the  people  of  England, 
in  a  series  of  pressures,  revulsions  and  currency  fluctuations, 
which  have  inflicted  injuries  and  losses  upon  the  government 
and  people  of  Great  Britain,  in  comparison  with  which  the  pre 
sent  national  debt  may  be  insignificant.  It  may  be  said,  how 
ever,  that  this  system  has  advantages  which  go  far  to  counter 
balance  these  evils.  But  what  should  be  thought  of  a  system 
of  currency  which  fluctuates  between  such  a  height  of  advantage 
on  the  one  hand,  and  such  a  depth  of  evil  on  the  other  ? 

The  suggestion  was  discussed  very  early  in  the  history  of  the 
Bank  of  England,  that  there  was  a  certain  proportion  which 
ought  to  be  preserved  between  the  liabilities  on  demand  and  the 
amount  of  coin  which  ought  to  be  kept  to  meet  them;  and  one- 
third  was  often  named  as  a  safe  proportion.  This  has  often 
been  repeated  and  relied  upon,  down  to  the  present  time.  As  a 
principle,  it  never  deserved  a  moment's  consideration ;  it  could 
never  be  anything  but  a  conjecture,  and  all  the  history  of  bank 
ing  proves  it  to  be  utterly  fallacious  in  the  hour  of  trial.  The 
same  principle  should  be  applied  to  the  engagements  of  banks 
which  is  applied  to  the  engagements  of  merchants  —  what  they 
engage  to  do,  they  should  be  held  strictly  to  perform.  If  they 
undertake  to  pay  all  their  notes  on  demand  in  specie,  there 
should  be  no  guessing  and  no  conjecture  in  the  matter,  but  full 
and  complete  preparation  to  meet  the  engagement.  Dollar  for 
dollar  should  be  the  rule,  or  means  to  obtain  the  dollars  before 
they  could  be  demanded. 

The  error  committed  by  the  Bank  of  England  was  not  in 
agreeing  to  pay  their  notes  in  specie,  but  in  issuing  notes  pay 
able  on  demand ;  in  discounting  paper  having  two,  three,  four 
or  more  months  to  run,  and  giving  their  own  notes  payable  in- 
stanter.  No  financial  contrivance  can  make  this  possible,  and 


,     £  5         SYSTEM    OF    POST-NOTES.  369 

no  ingenuity  ever  gave  a  sound  reason  for  it.  We  may  imagine 
that  all  the  commercial  paper  of  Great  Britain  was  discounted 
at  the  .Bank  of  England,  and  the  proceeds  issued  in  the  shape 
of  bank-notes ;  we  may  imagine  that  these  are  received  by  the 
public  as  a  convenience  of  the  highest  order,  being  the  change 
given  by  the  bank  for  the  very  inconvenient  paper  issued  by  in 
dividuals  ;  but  we  cannot  imagine  that  the  bank  could  pay  on 
demand,  in  gold  or  silver  coin,  a  sum  equal  to  the  whole  amount 
of  the  commercial  paper  issued  by  individuals.  It  would  require 
ten  times  as  much  coin  to  support  those  bank-notes  as  it  would 
to  pay  off  the  commercial  paper  in  exchange  for  which  they 
were  issued.  For  a  million  in  coin  would,  in  the  course  of  three 
months,  pay  off  ten  millions  as  it  matured  from  day  to  day ;  but 
it  would  require  ten  millions  in  coin  to  discharge  ten  millions  in 
bank-notes  payable  on  demand. 

We  are  far  from  contending  that  the  Bank  of  England  should 
have  issued  notes  not  payable  at  all  in  gold  or  silver.  The  bank 
should  have  promised  only  what  it  could  with  certainty  perform ; 
that  is,  to  pay  the  bank-notes  at  the  maturity  of  the  notes  for 
which  they  were  given.  There  may  have  been  then,  and  may 
be  yet,  serious  objections  in  practice  to  any  mode  of  issuing  bank 
paper  in  the  rather  unusual  form  of  post-notes,  maturing  on  an 
average  of  about  three  months.  That,  however,  is  the  true 
theory  of  bank-notes  issued  in  exchange  for  the  commercial 
paper  of  individuals  ;  if  a  proper  effort  had  been  made,  practice 
might  long  since  have  formed  a  sound  and  available  system  on 
this  safe  basis. 

It  would  be  very  safe  to  aver  that,  upon  the  system'  of  post- 
notes  issued  to  meet  the  maturing  of  the  notes  discounted  by  the 
bank,  the  Bank  of  England  would  never  have  suspended  pay 
ments  of  specie ;  and,  what  is  of  far  greater  consequence,  the 
bank  would  not  have  been  obliged  to  regulate  its  issues  accord 
ing  to  the  fluctuating  movements  of  specie ;  movements  which 
might  have  their  origin  in  India,  or  China,  or  America,  and  by 
which  the  whole  interior  or  domestic  business  of  the  country 
would  be  ruinously  affected,  though  without  any  necessary  or 
legitimate  connection. 
24 


3TO          THE    ACTUAL    MEDIUM    OF    EXCHANGE. 

It  should  be  borne  in  mind,  that  the  great  business  of  domestic 
and  foreign  trade  is  not  governed,  though  it  may  be  affected, 
by  the  fluctuations  in  the  supply  of  the  precious  metals.  The 
wants  of  men  at  home  and  abroad  must  be  supplied,  whether  the 
precious  metals  are  plentiful  or  scarce.  We  have  shown  that  the 
domestic,  as  well  as  the  foreign,  trade  is  mainly  an  exchange  of 
commodities  ;  and  that  the  only  use  made  of  gold  and  silver  is  in 
the  payment  of  balances,  and  in  the  small  dealings  of  the  retail 
trade.  It  is  a  false  and  unsafe  principle  to  assume  that  promis 
sory  notes  of  banks  or  individuals  must  fluctuate  in  supply  as  the 
precious  metals  fluctuate  in  quantity.  The  business,  that  is,  the 
exchange  of  its  commodities,  in  no  civilized  country  is  accom 
plished  by  coin  or  bullion,  and  in  the  present  state  of  productive 
industry  it  cannot  be  so  done.  The  great  transactions  in  com 
modities  by  which  they  are  distributed  in  every  country,  and 
between  different  countries,  and  thus  forwarded  for  consumption 
to  the  retail  venders,  are  carried  on,  in  the  first  instance,  by 
bills  of  exchange  and  promissory  notes,  the  amounts  of  which 
are  stated  in  money  of  account,  as  were  the  prices  for  which  the 
commodities  were  sold.  This  business  proceeds  ordinarily  with 
out  any  reference  to  the  supply  of  the  precious  metals.  The 
individual  paper  issued  in  these  transactions  being  exchanged 
for  bank-notes,  may  be  thus  paid  without  any  use  of  coins  or 
money,  except  the  balances  and  the  discount  paid  the  bank.  The 
bank-notes  should  not,  then,  fluctuate  with  the  supply  of  the 
precious  metals,  but  with  the  business  in  which  they  are  issued.1 
They  are  nothing  more  than  a  substitute,  by  the  bank,  of  its 
own  promissory  notes  for  those  of  individuals,  by  which  the  latter 
are  enabled  to  pay  their  debts  among  themselves.  If  a  man  of 
business,  who  had  issued  his  notes  and  acceptances  for  ,£10,000, 
found  they  had  been  discounted  in  the  Bank  of  England,  and 
that  .£9900  of  the  notes  of  the  bank  had  been  issued  in  exchange, 
he  could  find  no  better  nor  safer  medium  in  which  to  pay  his 
debt  to  the  bank,  than  these  bank-notes,  so  far  as  they  would 
reach.  He  would,  therefore,  give  any  commodities  he  had  pur- 

1  Ante,  pp.  163-4. 


THE    FUNCTIONS    OF    BANK    CURRENCY.         371 

chased  by  this  issue  of  his  own  paper  for  <£10,000,  to  procure 
the  bank-notes  with  which  to  pay  his  debts ;  for  the  bank-notes 
are,  for  his  purpose,  of  equal  avail  and  far  greater  convenience 
than  coin.  If  he  is  a  holder  of  the  notes  of  others  for  <£10,000, 
he  may  have  them  discounted,  and  thus  procure  the  notes  to  ex 
tinguish  his  indebtedness ;  the  bank  always  keeping  a  sufficient 
claim  on  its  debtors  to  redeem  all  its  notes.  It  is  a  process  by 
which  individuals  change  their  own  notes  into  bank-notes,  and 
with  them  pay  their  debts ;  in  other  words,  a  process  by  which 
men  apply  the  paper  which  others  owe  to  them  to  pay  the  paper 
upon  which  they  are  indebted  to  others.  In  any  business  com 
munity,  the  parties  who  issue  their  own  notes  largely  are  the 
same  who  receive  notes  largely  from  others :  thus,  when  this  in 
dividual  paper  is  converted  into  bank-notes,  it  furnishes  a  con 
venient  medium  for  the  discharge  of  these  mutual  debts ;  every 
one  being  willing  to  receive,  in  payment  of  debts  due  to  him, 
that  which  others  will  take  in  payment  of  his  debts. 

We  have  already,  in  the  chapter  on  bank-notes,  remarked  at 
some  length  on  their  peculiar  functions  or  applications ;  our 
object  is  now  only  to  recall  some  of  these,  and  to  show  how  bank 
notes  become  the  safest  medium  for  paying  the  promissory  notes 
or  acceptances  of  individuals.  A.  B.  is  the  creditor  of  C.  D.  for 
£1000,  and  holds  his  promissory  note,  at  four  months,  for  that 
sum:  A.  B.  carries  it  to  the  Bank  of  England,  and  receives 
there  for  it  <£980  in  bank-notes.  The  bank  becomes  thus  the 
creditor  of  C.  D.  for  <£1000,  and  it  becomes  thus  possible  for  C. 
D.  to  pay  his  debt  of  ,£1000  in  bank-notes,  less  the  discount. 
The  bank  is  equally  willing  and  ready  to  receive  its  own  notes 
in  payment,  from  every  one  of  whom  it  is  a  creditor.  It  has 
thus  issued  a  common  currency,  which  all  its  debtors  may  take, 
and  return  in  payment  of  the  debts  they  owe  to  the  bank.  The 
bank-notes  are  good,  not  because  the  bank  has  undertaken  the 
impossible  task  of  paying  them  in  specie  on  demand,  but  because 
there  is  an  effective  demand  for  every  note  issued  by  the  bank, 
to  pay  debts  due  to  the  bank,  and  which  must  be  paid  at  the 
risk  of  ruin. 

The  notes  issued  by  the  bank  in  the  purchase  of  bullion,  and 


372   THEORY  OF  DEMAND  FOR  BAXK-XOTES. 

on  the  deposit  of  coin,  rest  immediately  on  that  basis  of  bullion 
and  coin :  those  issued  in  exchange  for  commercial  paper  rest 
immediately  on  that  basis.  Supposing  the  notes  resting  on  these 
different  bases  to  have  been  distinguishable,  the  former  would 
return  to  the  bank  only  when  the  convenience  of  the  public  dic 
tated,  or  when  there  was  a  demand  for  the  bullion  or  coin  for 
which  they  were  given ;  the  latter  would  return  by  necessity, 
and  upon  a  different  principle. 

"When  the  bank  gave  its  notes  in  exchange  for  commercial 
securities,  it  held  the  person  liable,  on  these  securities,  for  an 
amount,  equal  to  the  discount,  greater  than  its  notes  emitted. 
It  looked,  of  course,  narrowly  at  the  ability  of  these  parties  to 
meet  their  engagements  at  maturity.  By  the  emission  of  its 
bills,  the  bank  furnished  to  the  public  the  very  medium  of  pay 
ment  which  would  pay  off  and  finally  discharge  the  commercial 
paper.  According  to  the  course  of  commerce,  the  party  who 
purchases  merchandise  gives  his  note  or  bill,  payable  at  a  sub 
sequent  day,  and  by  consequence  such  purchaser  has  at  his  com 
mand  merchandise  which  he  estimates  at  as  much  and  more  than 
the  amount  of  his  note  or  bill.  He  has  the  very  commodities  for 
which  he  gave  the  commercial  security  taken  by  the  bank  in  ex 
change  for  its  notes ;  these  commodities,  in  his  estimation  as  a 
merchant  or  dealer,  are,  on  being  sold,  sufficient  to  command  a 
value  in  money  or  bank-notes  equal  to  his  own  liability,  lie 
can  redeem  the  notes  of  the  bank  issued  for  his  paper,  by  sale 
of  the  same  goods  which  originated  his  paper.  The  merchant 
depends  on  sales  of  his  goods  for  means  to  pay  the  debts  he  con 
tracted  in  their  purchase ;  and  the  value  of  commercial  securi 
ties  depends  mainly  on  the  certainty  and  facility  with  which 
merchants  can  convert  their  goods  into  the  means  of  paying 
their  liabilities.  The  bank  furnished  a  facility  for  such  payment 
which  did  not  before  exist ;  and  the  goods  held  by  its  debtors 
would  be  freely  offered  for  its  notes,  they  being  as  available  as 
money  to  extinguish  indebtedness.  The  public,  by  this  issue, 
were  furnished  with  a  convenient  currency,  the  real  value  of 
which  would  be  fixed  by  the  demand  of  the  debtors  of  the  bank. 
These  could  neither  doubt  nor  temporize;  they  must  be  prepared, 


COMPETITION    AMONG    DEBTORS.  373 

on  the  day  of  payment,  with  either  the  money  or  bank-notes. 
The  demand  for  bank-notes  would  be  urgent  and  imperious :  the 
alternative  would  be,  the  notes,  or  money,  or  bankruptcy.  This 
demand,  as  already  observed,  would  more  than  equal  the  amount 
of  the  notes  in  circulation,  so  that  every  solvent  debtor  of  the 
bank  would  be  an  agent  to  give  value  to  its  notes,  to  withdraw 
them  from  circulation  by  offering  for  them  as  much  as  he  would 
for  a  corresponding  amount  of  gold  or  silver.  There  could  be 
no  depreciation  of  the  bank  issues  whilst  the  external  demand 
equalled  the  amount  issued.  If  the  bank  discounted,  in  a  week, 
a  million  sterling  of  commercial  securities,  all  running  off  in  four 
months,  at  the  rate  of  six  per  cent,  per  annum,  and  paid  out 
£990,000  in  its  own  notes,  the  debtors  of  the  million  would, 
within  the  four  months,  be  compelled  to  prepare  for  payment  of 
that  amount  as  it  matured ;  and  the  holders  of  the  notes  would 
soon  perceive  the  operation  of  the  necessity  to  which  these 
debtors  had  subjected  themselves.  The  bank-notes  would,  accord 
ingly,  be  held  at  the  same  value  as  coin,  because  they  would  pay 
the  same  amount  of  debt.  This  result  would  be  more  perfectly 
produced  by  the  working  of  the  bank,  after  it  had  been  long  in 
operation,  when  the  demand  for  its  notes  would  be  increased  by 
the  enlarged  amounts  falling  dne,  and  by  its  widening  circula 
tion,  which  would  carry  many  notes  beyond  the  reach  of  the 
debtor,  and  thus  force  him  to  pay  in  money  some  portion  of  his 
liabilities. 

A  merchant  may  purchase,  or  not,  as  he  deems  most  for  his 
interest;  he  may  select  his  own  time  for  dealing;  there  is  no 
actual  necessity  in  this  part  of  his  business.  But  having  once 
made  his  purchase,  and  given  his  paper,  a  necessity  from  which 
there  can  be  no  escape,  nor  evasion,  is  laid  upon  him  to  meet 
his  payment.  The  competition,  therefore,  among  the  debtors  of 
the  bank,  to  secure  its  notes  or  money,  would  equal,  if  not  sur 
pass,  any  other  competition  in  trade.  It  was  this  incessant  de 
mand,  pressed  by  the  very  merchants  who  held  goods  selected 
with  a  view  to  the  wants  of  the  public,  which  gave  to  bank-notes 
the  value  and  efficacy  of  money.  Doubtless,  the  promise  of  the 
bank  to  pay  its  notes  on  demand  had  weight  with  some;  very 


374          BASIS    OF    DEMAND    FOR    BANK-NOTES. 

few,  however,  received  the  notes  for  the  purpose  of  demanding 
coin,  or  because  coin  could  be  demanded ;  they  received  them 
because  they  could  be  employed  with  the  same  effect  as  money. 
They  were  more  abundant,  convenient  and  safe ;  they  answered 
the  same  purpose,  and  were  therefore  preferred.  The  immediate 
question  with  them  was,  will  these  notes  be  received  in  payment 
from  us,  and  not  as  to  the  ability  or  willingness  of  the  bank  to 
redeem  them.  It  was  nothing  to  the  receiver  of  the  notes  what 
might  be  the  actual  condition  of  the  bank,  so  that  the  notes 
would  pay  like  money.  Men  received  money  only  to  pay  it 
away ;  and  when  notes  were  offered  as  a  substitute,  they  were 
received  only  when  they  could  be  paid  like  money.  Individuals 
could  not  investigate  the  situation  of  the  bank,  but  they  could 
easily  ascertain  whether  bank-notes  would  buy  goods,  or  pay 
debts. 

If  the  commercial  paper  discounted  by  the  bank  was  payable 
in  a  short  time,  the  demand  for  the  notes  would  be  proportion- 
ably  active,  as  the  debtors  must  be  prepared  at  the  day  with 
notes  or  money.  If  it  happened  that  a  portion  of  the  debtors 
failed  to  make  good  their  engagements,  and  take  up  their  paper, 
then  a  corresponding  demand  for  the  bank-notes  ceased,  and  a 
surplus  remained  in  the  hands  of  the  public,  which  must  soon  or 
late  be  presented  for  payment  to  the  bank,  upon  which  the  loss 
in  such  cases  fell. 

It  is  upon  the  operation  of  this  active  exterior  demand  for  its 
notes,  that  the  Bank  of  England  has  been  so  eminently  success 
ful  during  its  whole  existence  of  one  hundred  and  fifty  years, 
through  many  severe  trials,  and  one  long  period  in  which  it  did 
not  pay  its  notes  on  demand  in  specie.  If  the  potency  of  this 
demand,  in  sustaining  a  circulation  of  bank-notes,  were  not  seen 
at  a  glance,  it  is  abundantly  proved  by  the  fact  that  the  Bank 
of  England,  during  this  suspension  of  twenty-five  years,  main 
tained  a  vast  circulation  not  redeemable  in  specie.  Its  notes 
were,  during  this  time,  the  chief  medium  of  payment.  It  is  well- 
known  that  every  attempt  to  obtain  such  a  circulation  has  failed, 
unless  founded  upon  a  specie  basis,  or  upon  an  exterior  demand 
equal  to  the  amount  of  the  circulation.  The  most  arbitrary  and 


THE  BANK  LENDS  CURRENCY,  NOT  MONEY.   375 

despotic  government  has  never  succeeded  in  forcing  a  circula 
tion,  and  in  keeping  it  at  par,  in  violation  of  these  principles. 
But  we  shall  revert  to  this  subject  again. 

We  have  thought  proper  to  insist  upon  the  efficacy  of  the  de 
mand  for  bank-notes  created  by  indebtedness  to  the  bank,  in 
supporting  a  circulation,  because  many  in  England  supposed 
that  a  large  portion  of  the  notes  of  the  Bank  of  England  had  no 
other  basis  than  a  promise  to  redeem  them  on  demand.     The 
fact  that  the  bank  had  promised  to  pay  its  notes  on  demand  — 
a  promise  held  out  because  it  was  not  expected  that  performance 
would  be  exacted  —  seemed  to  lead  a  portion  of  the  public  into 
the  belief  that  in  it  consisted  the  whole  security  and  value  of  the 
notes.    This  idea  once  entertained,  continual  apprehensions  were 
felt  by  the  timid  and  distrustful,  even  whilst  the  notes  were  daily 
fulfilling  every  function  which  could  be  required  of  them.     The 
bank  merely  designed  to  offer  a  currency  which  would  be  adequate 
to  all  the  ordinary  payments,  and  which  would  command  money 
whenever,  from  special  circumstances,  it  might  be  needed.    This 
it  performed  for  more  than  a  century,  but  unhappily  not  without 
creating  the  impression  that  its  notes  were  all  based,  like  the 
credits  of  Amsterdam,  on  an  equivalent  in  specie.     And  as  the 
holders  of  the  English  notes  knew  that  such  equivalent  never 
existed  in  the  bank,  they  supposed  themselves  called  upon  to 
believe  that  the  bank,  upon  emergency,  could  procure  the  coin 
to  redeem  its  issues.     The  bank  could,  it  is  true,  at  all  periods 
of  its  history,  have  furnished  to  the  holders  of  its  notes  as  much 
coin  as  was  really  needed  for  the  purposes  of  domestic  or  foreign 
trade.    In  one  condition  of  commerce,  the  precious  metals  would 
flow  into  the  bank  ;  in  another,   they  would  flow  out.     In  all 
which,  the  bank  was  able  and  bound  to  accommodate  its  cus 
tomers.     The  goodness  of  its  notes  issued  for  commercial  paper 
would  not  depend  upon  these  ebbs  and  flows  of  specie,  but  on  the 
solvency  of  the  debtors  of  the  bank ;  and  this  solvency  would 
not  depend  on  the  amount  of  specie  in  the  country,  or  in  the 
bank,  but  on  the  means  which  the  debtors  held  to  command  the 
bank-notes. 

There  was  a  great  difference  between  furnishing  to  commerce 


376    COMMERCIAL    SECURITIES    NOT   BASED    ON   COINS. 

all  the  coin  really  required  for  the  payment  of  balances,  and 
converting  at  once  all  the  issues  of  the  bank  into  gold  or  silver. 
So  far  as  commerce  is  concerned,  the  latter  was  impossible,  and 
wholly  unnecessary.    Commerce  could  provide  for  its  own  neces 
sities,  and  would  have  placed  the  bank  in  the  proper  condition 
for  this  purpose  ;  but  a  panic  got  up  under  the  idea  that  bank 
notes,  to  be  good,  must  necessarily  be  payable  on  demand,  it  could 
neither  resist  nor  allay.     There  has  never  been  a  time,  in  the 
history  of  the  Bank  of  England,  when,  if  a  sufficient  amount  of 
its  notes  had  been  presented  to  absorb  all  its  specie,  the  balance 
in  circulation  would  not  have  been  perfectly  safe  and  good.    The 
question  of  depreciation  is  not  touched  here ;  its  important  bear 
ing  on  this  subject  will  require  more  than  a  passing  consideration. 
Whatever  reasons  of  expediency  or  sound  policy  there  may 
have  been  for  requiring  a  bank  to  pay  its  notes  in  specie,  it  is 
no  more  right  to  say  that  the  issues  of  the  Bank  of  England 
were  based  upon  coin,  or  a  promise  to  pay  in  coin,  than  it  was 
to  say  that  the  commercial  securities  discounted  by  that  bank 
were  founded  upon  their  promise  to  pay  coin.     The  real  basis 
of  the  commercial  paper  was  the  commodities  for  which  that 
paper  was  given ;  and  that  basis  was  not  changed  or  disturbed 
by  the  fact  that  the  evidences  of  debt  to  which  it  had  given  rise 
were  paid,  settled,  arranged  or  extinguished  in  any  other  way 
than  by  payment  in  coin.     A  very  small  part  of  these  evidences 
would  have  been  paid  in  coin,  if  they  had  not  gone  into  the 
bank ;  they  must  and  would  have  been  adjusted  in  some  other 
way.     The  same  goods  which  formed  the  basis  of  the  commercial 
paper,  became  the  basis  of  the  bank-notes  into  which  that  paper 
was  converted ;  and  there  was  no  commercial  necessity  that  the 
bank-notes  should  be  paid  in  coin,  any  more  than  the  commercial 
securities.     There  was  an  advantage  in  being  able  to  procure 
coin  when  specially  needed ;  but  a  great  mischief,  in  supposing 
that  bank-notes  could  not  be  as  good  as  gold,  without  being 
convertible  instantly  into  gold ;  that  beef  and  mutton  purchased 
with  bank-notes  were  not  as  good  as  if  purchased  with  silver ; 
and  that  debts  paid  with  bank-notes  were  not  as  fully  extin 
guished  as  if  discharged  in  gold  or  silver. 


CONCENTRATION    OF    PAYMENTS    IN    LONDON.     377 

"We  have  said  more  than  belongs  to  this  place,  of  the  nature 
of  the  circulation  issued  by  the  Bank  of  England ;  the  chief  de 
sign  now  being  to  point  out  the  mode  and  facilities  of  payment 
afforded  by  such  a  circulation,  compared  with  those  before  en 
joyed.  It  cannot,  however,  be  necessary  to  speak  of  the  supe 
rior  conveniences  and  advantages  of  bank-notes  as  a  medium  of 
payment.  The  sturdiest  objector  to  banks  does  not  deny  what 
is  so  manifest :  his  objection  goes  to  the  risk  of  loss,  the  danger 
of  fraud,  and  the  abuses  of  credit.  In  all  cases,  where  banks 
of  circulation  have  been  established  and  conducted  with  even  a 
moderate  degree  of  prudence  and  skill,  the  notes  have  almost 
invariably  been  preferred  to  gold  and  silver.  There  is,  in  fact, 
no  comparison  between  bank-notes  kept  at  their  proper  value 
and  coin  as  a  medium  of  payment,  in  regard  to  convenience, 
safety  and  efficiency.  We  cannot  now  conceive  of  any  medium 
of  payment  intended  for  general  circulation,  superior  in  these 
respects  to  bank-notes  fully  enjoying  the  public  confidence. 
Greater  permanence  may  yet  be  given  to  the  paper,  and  addi 
tional  safeguards  provided  by  the  engraver  against  forgery ;  but 
nothing  superior  in  facility  will  ever  probably  come  to  the  aid 
of  commerce.  ^ 

Those,  however,  who  have  adequate  ideas  of  the  power  of 
credit,  know  that  bank-notes  cannot  exhibit  the  highest  stage 
of  its  utility.  Ever  since  the  establishment  of  the  Bank  of 
England,  there  has  been  an  increasing  tendency  in  the  payments 
of  commerce  to  concentrate  in  London.  Although  the  bank  had 
furnished  a  medium  at  par  with  gold  in  London,  and  at  par,  if 
not  worth  more,  through  all  the  Island,  yet  the  practice  com 
menced,  and  has  continued  until  this  day,  of  giving  notes  and 
bills  payable  in  that  city ;  and  of  course  merchants  and  dealers 
received  and  paid  there  a  large  proportion  of  their  credits  and 
debts.  Those  who  had  money  on  hand  found  it  as  available  in 
London,  and  more  safe  than  at  home ;  those  who  had  to  pay 
money  could,  with  credit,  more  readily  obtain  it  there  than  at 
home.  But  that  great  city  became  not  only  banker  for  the 
whole  Island,  and  for  the  whole  British  dominions,  but  for  all 
nations  having  commerce  there.  An  immense  and  hitherto  un- 


378  EFFECTS    OF    CONCENTRATION. 

paralleled  concentration  of  payments  took  place  in  London. 
This  was  in  compliance  with  a  law  of  trade  which  continually 
presses  upon  merchants  the  necessity  of  increasing  the  efficiency, 
and  economizing  the  means  of  payment.  Great  Britain  has  long 
been  the  country  which  has  displayed  the  proudest  triumphs  of 
commercial  integrity.  All  the  world  has  been  willing  to  confide 
money  to  the  London  bankers.  It  was  too  obvious  to  escape  the 
attention  of  British  traders  out  of  that  city,  that  the  more  the 
bank-notes  and  bank  credits  were  concentrated,  the  more  rapidly 
they  could  be  circulated.  A  million  in  the  city  could  perform 
as  many  payments  in  a  day,  as  five  millions  scattered  over  the 
country.  The  system  in  the  city  tended,  as  we  have  seen,  to 
resolve  itself  into  the  operation  of  paying  by  checks,  which  was 
safer  and  more  rapid  than  with  notes.  There  can  be  no  ques 
tion  among  those  who  have  examined  the  subject,  that  the  saving 
in  the  use  of  bank-notes,  in  time  and  in  trouble,  in  making  the  pay 
ments  of  London  has  been  a  vast  assistance  to  British  commerce. 
The  accumulation  of  money  there  has  greatly  strengthened  the 
bank,  and  has  enabled  it  more  freely  to  advance  to  the  govern 
ment,  and  to  merchants,  than  it  could  otherwise  have  done.  In 
regard  to  the  payment  -of  specie,  the  bank  was  more  in  the  power 
of  the  private  bankers  and  merchants  in  the  metropolis ;  but 
they  were  less  dangerous  than  the  same  classes  in  the  country. 
The  bank  had  more  command  of  its  circulation  than  if  it  had 
been  diffused  among  the  whole  population;  and  could,  with 
greater  facility,  increase  or  dimmish  it  as  the  demands  of  com 
merce  might  require.  This  system  was  directly  opposed  to  its 
interests,  so  far  as  it  regarded  a  very  great  and  wide  circulation 
of  its  notes ;  but,  in  many  other  respects,  it  promoted  the  best 
interests  of  the  bank,  of  the  public  treasury,  and  the  kingdom 
at  large.  It  was  found  that,  in  one  period  of  the  year,  the  agri 
cultural  counties  had  a  surplus  in  the  hands  of  their  bankers, 
which  could  be  lent  to  the  manufacturers,  whose  surplus,  in  the 
time  of  their  harvest,  could  be  lent  to  the  aid  of  the  farming  in 
terest  ;  and  during  all  the  year,  these  funds  were  at  the  com 
mand  of  commerce,  when  otherwise  unemployed. 


CREDITS    IN    ACCOUNT.  379 

I  3.  The  Bank  of  England's  credits  in.  account  —  Deposit  of  bank-notes  — 
Funds  in  bank  —  Conversion  of  individual  paper  into  lank-notes  —  The 
Bank  grants  credits  for  private  paper,  and  receives  the  credits  in  all  pay 
ments  —  The  credits  wrongly  blended  with  deposits  —  Open  credits  payable 
on  demand  in  specie,  hazardous —  Objections  —  Paying  credits  on  demand 
abolishes  time  on  bills  of  exchange,  and  promissory  notes  —  Mingling  credit 
and  money  —  Consequences  —  Real  nature  of  the  credits  in  account  —  Ex 
pand  with  trade,  diminish  with  it — Not  money — Payment  by  bank  credits 
not  dependent  on  money  —  Not  a  question  of  convertibility. 

We  have  seen  how  a  bank,  with  all  its  capital  lent  to  the 
government,  could  do  business  upon  its  deposits,  and  by  the 
issue  of  bank-notes ;  it  remains  to  consider  how  much  larger  a 
business  than  in  either  of  these  ways  could  be  done  with  its 
credits.  The  business  of  granting  credits  to  its  customers,  in 
the  manner  we  are  about  to  specify,  did  not  probably  occur  to 
the  Governor  and  Company  of  the  Bank  of  England  until  after 
the  bank  had  commenced  business.  It  was  rather  a  result  of  the 
two  branches  of  business  we  have  specified,  than  a  forethought. 
There  is  no  doubt  they  intended  to  employ  their  credit  in  every 
proper  and  available  way,  but  they  did  not  foresee  the  vast  busi 
ness  which  would  be  opened  on  their  books  for  their  own  profit, 
and  the  advantage  of  the  public,  by  the  mere  use  of  CREDITS  IN 
ACCOUNT. 

The  progress  of  their  business  soon  revealed  to  the  bank,  that 
their  customers  not  only  needed  a  place  of  deposit  and  security 
for  their  coin  and  bullion,  but  also  for  their  bank-notes.  The 
deposits  of  coin,  of  which  we  have  treated  above  separately  for 
the  sake  of  distinctness,  were  swelled  by  the  deposit  of  large 
sums  in  bank-notes.  It  was  soon  perceived  that  a  much  larger 
amount  of  payment  was  effected  by  this  movement  of  the  depo 
sits,  than  by  the  circulation  of  both  bank-notes  and  coin.  The 
chief  demand  for  means  to  pay  debts  was  not  for  bank-notes,  or 
for  coins,  but  for  funds  in  bank ;  and  this  demand  was  early 
responded  to,  on  the  part  of  the  bank,  by  discounting  business- 
paper,  and  giving  the  customer  for  whom  the  discount  was  made, 
not  bank-notes  or  coin,  but  simply  a  credit  in  his  account,  which 
to  that  amount  swelled  his  deposit.  This  credit  rested  on  the 


380  CREDITS    IN    ACCOUNT. 

same  basis  precisely  as  that  upon  which  the  bank-notes  were 
issued,  namely,  individual  business-paper.  By  this  device  the 
deposits  of  the  bank  were  increased  to  a  sum  far  beyond  the 
aggregate  of  bank-notes  and  coin  on  deposit.  The  bank  became, 
to  some  extent,  a  book-keeper  for  its  customers ;  it  gave  them  a 
credit  for  their  claims  upon  others,  and  charged  them  with  the 
claims  of  others  upon  them.  This  was  the  case  so  far,  at  least, 
as  the  respective  claims  were  discounted ;  and  the  bank  charged 
the  same  commission,  or  discount,  for  this  credit  in  account  as 
it  did  when  it  advanced  or  lent  coins,  or  issued  bank-notes.  This 
became  soon  the  most  important  department  of  the  business  of 
the  bank,  as  well  as  the  most  profitable ;  for  the  keeping  these 
accounts  was  not  so  expensive  to  the  bank  as  issuing  its  notes. 

These  credits,  as  soon  as  given  and  entered  in  the  deposit 
account  of  a  customer,  were  worked  in  the  same  way,  and  to  the 
same  effect,  as  deposits  of  coin  and  bank-notes.  No  distinction 
was '  made  in  the  management,  use  or  efficacy  of  a  deposit,  whe 
ther  it  originated  in  one  of  these  ways  or  another.  The  bank, 
for  every  amount  of  credit  thus  granted,  held  the  corresponding 
amount  of  discounted  paper.  The  return  of  the  corresponding 
amount  of  credit  was  all  the  payment  the  bank  asked  for  the 
business-paper  it  held.  The  credits  were,  therefore,  as  efficacious 
to  discharge  a  debt  in  bank  as  coins  or  bank-notes.  The  bank 
held  the  individual  notes  against  the  credits  it  granted ;  it  sur 
rendered  them  on  the  return  of  the  same  amount  of  credits,  or 
the  amount  granted  for  each  note  or  bill,  with  the  amount  of  the 
discount  in  money.  The  bank  liquefied  for  its  customers  the  in 
convenient  and  unemployed  individual  paper  in  their  port-folios, 
and  made  it  available  by  transfer,  in  any  desired  amount,  for 
the  payment  of  debts.  A  man  with  £10,000  of  private  paper, 
in  twenty  notes  of  various  amounts,  could  do  little  or  nothing 
with  them  in  payment  of  his  own  liabilities;  but  with  credits  in 
deposit  to  the  amount  of  X9900,  he  could  effect  any  payment  or 
purchase  which  he  could  have  done  .with  the  money. 

This  would  have  made  a  safe  and  extremely  profitable  busi 
ness  to  the  bank ;  but  it  involved  an  onerous  obligation,  and  a 
heavy  risk.  The  credits  were  entered  in  the  deposit  accounts 


CREDITS     PAYABLE     ON    DEMAND.  831 

of  the  customers,  which  deposits  were  made  up  of  bank-notes, 
bullion  and  coin,  and  were,  by  the  practice  of  the  bank,  payable 
on  demand  in  coins.  Thus  the  bank,  whilst  exchanging  a  credit 
on  its  books  for  business-paper  having  several  months  to  run, 
became  liable  to  pay  these  credits  on  demand  in  coin.  This 
liability  became  one  of  great  hazard  to  the  bank ;  for,  whilst 
any  run  upon  it  for  payment  of  notes  would  be  gradual,  because 
the  notes  were  always  widely  circulated,  the  demand  for  depo 
sits  could  be  made  instantly  to  a  very  large  amount.  The  depo 
sitors  in  the  bank,  from  an  early  period  of  its  existence,  have 
always  had  it  in  their  power  to  demand  more  money  from  the 
bank  than  it  could  pay,  and  of  course  to  force  it  into  suspen 
sion. 

This  was  not  a  necessary  risk.  The  credit  account  should 
have  been  purely  a  credit  account,  only  payable  by  the  bank  in 
money  when  the  paper  matured  for  which  the  credit  was  granted. 
The  credit  granted  by  the  bank  answered  every  needful  purpose, 
without  being  payable  on  demand.  The  real  legitimate  operation, 
whether  the  bank  issued  its  notes  or  granted  credits,  was,  that  the 
payment  of  the  discounted  paper  by  the  drawers  or  acceptors 
should  absorb  the  bank-notes  or  credits,  and  return  them,  or 
something  that  would  redeem  them,  to  the  bank.  This  routine 
of  operation  would  end  the  transactions  in  each  case.  The  bank, 
in  receiving  a  promissory  note  at  ninety  days,  received  but  a 
security  for  a  credit  granted  by  one  individual  to  another ;  for 
this  it  exchanged  its  own  credit,  which,  to  make  the  transaction 
correspond,  should  also,  so  far  as  it  concerned  payment  in  money 
or  coins,  have  been  at  ninety  days.  Nothing  more  should  have 
been  attempted,  where  nothing  more  could  be  accomplished, 
than  to  make  business  or  commercial  paper  available  for  the  pur 
pose  of  adjustment,  payment  of  debts,  or  set-off  of  mutual  claims. 
The  bank  could  spread  all  a  man's  credits  on  its  books,  and 
make  them  available  for  the  payment  of  his  debts.  It  could 
render  him  no  greater  service ;  it  could  neither  convert  his 
paper  into  money,  nor  lend  him  the  amount  in  money,  nor  could 
it  safely  agree  to  pay  on  demand  the  credits  granted  on  its 
books.  The  promissory  notes  and  acceptances  issued  in  the 


382  TRANSFER    OF    BANK    CREDITS. 

course  of  business  or  time  should  not  have  been,  by  any  attempted 
device  of  banking,  changed  into  notes  or  debts  payable  on  de 
mand  ;  it  was  too  hazardous  a  measure ;  there  was  no  need  for 
it.  It  is  enough  that  a  safe  method  had  been  found  of  changing 
these  time  securities  into  a  shape  in  which  they  could  be  as  fully 
available  for  their  own  payment  and  final  discharge,  as  either 
gold  or  silver. 

The  transfer  of  credits  permitted  to  the  depositors  on  their 
written  order  or  check  became,  in  the  hands  of  the  great  mer 
chants  and  dealers  in  commercial  securities  in  London,  one  of 
the  most  effective  modes  of  payment  ever  employed.  It  was 
freed  from  the  forms  and  precautions  which  were  practised  at 
the  continental  banks ;  and  any  conceivable  amount  of  pay 
ments  could  be  made  in  a  morning  by  the  active  movement  of  a 
comparatively  small  sum  on  the  books  of  the  bank.  At  the 
Bank  of  Amsterdam,  he  who  received  a  transfer  in  bank  for  pay 
ment,  could  not  transfer  or  pay  away  the  amount  thus  received 
until  the  next  day  —  a  precaution  which  must  have  checked  the 
circulation  of  the  deposits  to  a  most  injurious  extent ;  but  for 
this  regulation,  it  may  be  presumed  that  a  third  of  the  actual 
deposits  would  have  fully  sufficed  to  make  all  the  payments  of 
Amsterdam.  There  was  nothing  in  the  constitution  of  the  depo 
sit  banks  which  prevented  them  from  offering  the  same  facilities 
of  transfer  as  the  Bank  of  England ;  but  when  they  were  esta 
blished,  the  minds  of  merchants  had  not  conceived  such  a  con 
venience,  nor  the  efficacy  of  such  a  rapid  circulation.  The  banks 
once  in  operation  could  not  easily,  without  creating  apprehen 
sion,  make  any  great  change  in  their  mode  of  conducting  busi 
ness. 

It  is  difficult  to  imagine  any  scheme  of  adjusting  the  large 
payments  of  commerce  superior  to  this.  It  embraces  at  once  all 
the  efficacy  of  set-off,  and  all  the  convenience  of  rapid  circula 
tion  ;  the  advantages  of  both  these  processes  enter  into  and  form 
the  basis  of  this  successful  mode  of  payment.  It  is  superior  to 
the  mere  operation  of  set-off  between  individuals,  because  this 
requires  a  meeting  to  adjust  accounts ;  it  is  superior  to  the  mere 
circulation  of  bank-notes,  because  it  is  applicable  to  any  frac- 


BANK    CREDITS    NOT    MONEY.  383 

tionary  sum ;  it  saves  the  risk  of  counterfeits,  of  theft,  and  of 
fire,  and  all  the  trouble  and  time  of  receiving,  counting  or  lock 
ing  up  notes ;  and,  more  than  all,  it  saves  the  necessity  of  a 
deposit  of  coin.  The  bank  takes  all  the  risk  of  forgery  from  its 
customer,  who  has  only  to  avoid  taking  checks  from  those  whose 
honesty  he  doubts.  The  merchant's  check-book  lies  open  before 
him,  and  his  deposits  can,  by  his  own  hand  only,  be  changed 
in  an  instant  into  that  which  is  as  available  as  money. 

No  error  in  practice  or  principle  which  can  be  laid  to  the 
charge  of  the  Bank  of  England,  was  more  full  of  risk  and  dan 
ger  than  this  undertaking  to  pay  bank  credits  on  demand.  It 
was  an  engagement  useless  as  a  security  to  the  public,  because 
it  could  not  be  kept,  if  performance  was  demanded,  and  it  was 
useless,  if  performance  could  not  be  exacted.  To  make  this 
more  plain,  let  us  suppose  that  a  manufacturer  or  merchant,  de 
sirous  of  making  his  own  paper  as  available  as  possible  in  the 
furtherance  of  his  business,  had  issued  X1000  in  =£20  notes,  pay 
able  in  four  months ;  that  the  drawer  of  these  notes,  finding  his 
credit  not  sufficient  to  give  them  proper  and  useful  currency,  had 
carried  them  to  the  bank,  and  proposed  to  give  at  the  rate  of  two 
per  cent,  on  the  whole  amount,  if  the  bank  would  endorse  them ; 
that,  for  this  commission,  or  interest,  on  the  notes  for  the  time 
they  had  to  run,  the  bank  had  lent  its  credit,  by  endorsing  the 
notes,  making  them  thereby  current  for  all  purposes  of  payment 
—  this  would  have  been  all  thex  aid  or  facility  the  bank  could 
safely  give,  by  the  mere  use  of  its  credit.  If  the  bank  could  not 
lend  the  party  the  money  on  security  of  his  X20  notes,  it  could 
only  offer  the  aid  of  its  credit  to  make  the  notes  good  and  avail 
able  until  the  day  of  payment  arrived.  The  bank  could  not  pay 
the  debt  of  its  customer,  if  it  could  not  lend  him  the  money ;  the 
issuer  of  the  notes  endorsed  by  the  bank  would  have  been  obliged 
to  pay  them  at  maturity,  and  upon  faith  of  this  only  could  the 
bank  have  ventured  to  endorse  them.  The  bank  could  not  ex 
tend  its  aid  to  the  drawer  of  the  notes  beyond  their  maturity, 
for  that  would  have  been  equivalent  to  paying  them.  The  per 
sons  into  whose  hands  these  endorsed  notes  would  fall,  would 
expect  punctual  payment,  and  the  bank  or  drawer  must  pay; 


384  CREDITS    BY    DISCOUNTS. 

but  as  the  bank  could  only  lend  credit,  it  could  not  pay  all  the 
debts  of  those  it  could  aid  with  its  credit.  The  bank  could  not, 
therefore,  extend  the  aid  of  its  credit  beyond  the  maturity  of 
the  notes  guaranteed,  because  that  would  involve  payment  by 
the  bank. 

But  if  the  bank  could  not  safely  assume  the  debts  of  its  cus 
tomers,  at  the  maturity  of  notes  endorsed  by  them,  it  could  not 
agree  to  pay  these  endorsed  notes  on  demand  in  money.  Yet 
this  is  the  very  thing  which  the  bank  actually  undertook  to  do ; 
it  issued  its  own  notes,  payable  on  demand  in  gold  or  silver,  in 
exchange  for  the  notes  of  merchants  and  manufacturers,  pay 
able  in  three  or  four  months :  that  is,  the  bank  discounted  notes 
of  its  customers  to  the  amount  of  millions  sterling,  payable 
on  demand ;  it  virtually  made  a  four  months'  note  payable  in- 
stanter ;  it  abolished  time  on  notes  and  bills  of  exchange,  and 
made  them  payable  on  demand,  relying  on  a  generous  public  not 
to  take  advantage  of  the  extraordinary  offer. 

33ut  the  bank  was  still  more  daring ;  it  discounted  notes 
largely,  and  carried  the  amount  of  the  proceeds  to  the  credit  of 
the  party,  as  so  much  money  deposited :  that  is,  in  the  same 
column  in  which  the  bank  gave  its  customers  credit  for  gold  and 
silver  deposits,  it  gave  them  credit  for  the  amounts  of  notes  and 
acceptances  having  months  to  run  before  maturity,  and  engaged 
to  pay  the  amount  of  these  securities  on  demand.  It  mingled  a 
process  of  credit  with  a  process  of  cash,  in  a  mode  as  absurd  in 
theory  as  it  was  dangerous  in  practice.  The  men  who  had  given 
their  notes  on  time  had  provided  for  a  regular  progression  of 
payments,  according  to  the  movements  of  business  and  the  de 
mands  of  consumption ;  but  the  Bank  of  England  virtually 
abolished  the  contract  of  deferred  payment  between  the  parties, 
and  became  paymaster  on  demand  of  debts  not  due  for  months, 
and  to  an  immense  amount. 

The  bank  had  no  warrant,  in  principle  or  in  practice,  for  this 
hazardous  engagement.  Its  only  excuse  was  the  same  which 
was  given  for  the  issue  of  bank-notes  payable  on  demand,  with 
out  the  money  to  pay,  namely,  that  the  bank  would  not  be  asked 
to  pay  them  all  at  one  time. 


DANGERS  OF  THE  SYSTEM.          385 

We  regard  this  error  of  the  Bank  of  England  as  the  parent 
of  the  greater  portion  of  the  mischiefs  and  evils  for  which  banks, 
in  more  modern  times,  are  answerable.  The  banks,  from  that 
day  to  this,  have  continued  to  issue  notes  payable  on  demand, 
and  to  grant  credits  so  payable,  in  exchange  for  securities  pay 
able  in  from  30  to  120  days.  They  do  this,  relying  wholly  on 
the  forbearance  of  the  public,  just  as  the  Bank  of  England  did 
at  first.  Sad  experience  has  shown  that  there  are  times  when 
the  public  is  not  only  not  forbearing,  but  when  men  rush  with 
frantic  haste  to  demand  of  the  bank  payment  of  both  notes 
and  deposits.  Nearly  every  bank  in  existence,  conducted  on 
this  plan,  has,  at  some  period  of  its  history,  felt  the  power  and 
rashness  of  the  public  in  seasons  of  commercial  panic.  The 
banks  lose  their  power  and  usefulness  at  the  very  moment  when 
the  public  most  needs  their  assistance.  Friends  in  sunshine, 
they  become  enemies  in  the  storm. 

This  mistaken  step  of  the  Bank  of  England,  perpetuated  by 
our  modern  banks,  and  producing  some  of  the  worst  results  of 
modern  banking,  demands  more  full  explanation  of  its  nature, 
and  the  causes  of  its  operating  so  injuriously.  It  may  be  less 
difficult  to  comprehend  the  evil,  in  its  origin  in  one  bank,  than 
in  the  midst  of  the  complications  of  thousands  of  banks. 

We  have  already,  in  another  place,  shown  what  was  as  true  in 
the  17th  century  as  it  is  now,  that  the  great  operations  of  in 
dustry  and  trade  are  nearly  altogether  carried  on  by  individual 
credit.  Merchandise  and  raw  materials  were,  at  the  origin  of 
the  Bank  of  England,  as  now,  purchased  and  sold  for  promissory 
notes  and  bills  of  exchange.  There  was  no  time  when  there 
were  not  such  securities  in  the  hands  of  individuals,  to  represent 
the  chief  transactions  which  had  taken  place  in  the  previous  few 
months.  The  average  credit  may  have  been  two,  three  or  four 
months ;  but,  whatever  it  was,  there  were  bills  of  exchange  and 
promissory  notes  extant,  to  show  that  individuals  had  undertaken 
to  pay  every  specific  sum  in  a  specific  time.  To  some  extent, 
this  individual  paper  was  always  circulated  in  purchases  and  in 
payments ;  but  its  use,  in  that  way,  was  always  limited  and  in 
convenient.  It  was  upon  this  mass  of  business-paper,  which 
25 


386      ADJUSTMENT — THE    CONTINENT — ENGLAND. 

could  not  have  been,  in  London,  in  1696,  less  than  five  millions 
sterling,  that  the  Bank  of  England  designed  to  operate.  On 
the  continent,  many  devices  were  resorted  to,  as  we  have  seen  in 
the  Fairs  of  Lyons,  and  the  Banks  of  Venice  and  Genoa,  to 
enable  the  parties  to  such  paper,  debtor  and  creditor,  to  adjust 
their  mutual  claims  without  the  necessity  of  payment  in  coin. 
The  parties  holding  this  paper  were,  for  the  most  part,  both 
debtors  and  creditors ;  they  both  received  it  from  others,  and 
gave  it  to  others.  With  them  the  great  problem  was,  how  to 
pay  with  the  greatest  economy  and  convenience.  What  each 
needed,  was  some  plan  by  which  he  could  use  the  notes  or  bills 
of  exchange  he  held,  to  pay  or  satisfy  those  which  others  held 
against  him.  This  facility  had  been  afforded  in  England  only 
by  private  bankers ;  but  when  it  came  to  be  offered  by  the  Bank 
of  England,  on  a  larger  scale,  and  with  greater  security,  the 
opportunity  was  gladly  accepted. 

He  who  had  liabilities  to  the  amount  of  <£5000  to  pay,  in  any 
given  month,  might  have  promissory  notes  and  acceptances  to  a 
much  larger  amount  in  his  hands,  but  be  wholly  unable  to  apply 
them,  before  they  had  matured,  to  the  payment  of  his  own,  which 
would  mature  sooner.  The  bank  offered  the  required  facility — 
a  credit  on  its  books  for  the  paper  not  yet  due ;  upon  which 
credit  he  was  permitted  to  draw  for  the  amount  of  each  of  his 
maturing  liabilities  as  they  became  due,  transferring  so  much  of 
his  credit,  upon  every  occasion,  as  would  be  necessary  to  extin 
guish  a  debt.  As  the  bank  dealt  with  one,  so  it  dealt  with  all. 
It  liquefied,  as  it  were,  upon  its  books,  these  promissory  notes 
and  acceptances  to  the  amount  of  millions  sterling.  In  the 
hands  of  the  holders  they  were  securities,  evidences  of  debt  and 
credit  incapable  of  subdivision,  and  available,  to  a  very  small 
extent,  as  a  currency  or  in  payment ;  but,  spread  as  credits  on 
the  books  of  the  bank,  they  became  one  of  the  most  efficient 
means  of  payment  or  adjustment  ever  employed.  The  whole  of 
this  individual  paper  became,  on  the  books  of  the  bank,  a  fund 
which  could  be  drawn  upon  and  used  in  payments  to  its  whole 
amount.  Every  man  concerned  in  it  would  be  enabled  thus 
to  apply  his  credits  to  the  payment  of  his  debts.  No  better 


MONEY    NOT    NEEDFUL    TO    ADJUSTMENT.      88T 

payment  could  be  made,  and  in  the  case,  none  more  economical. 
It  could  be  more  economical  and  easy  only  where  men  set-off,  in 
comparing  their  mutual  accounts,  their  charges  one  against 
another.  The  bank  provided,  in  fact,  a  system  by  which  it  kept 
books  of  account  for  parties  holding  claims  upon  each  other. 
If  the  bank  gave,  on  these  books,  a  credit  of  a  million  sterling, 
receiving  therefor  the  paper  of  parties  indebted  to  that  amount, 
the  bank  required  no  better  payment  than  the  return  of  an 
equivalent  amount  of  credit  for  each  note  or  acceptance  retired. 
This  whole  matter  would  have  been,  on  the  books  of  the 
banks,  the  working  of  a  process  of  adjustment.  It  no  more 
required  the  presence  of  gold  or  silver,  than  it  is  required  by 
those  who  balance  their  book  accounts.  The  money  would  be 
required  only  where  the  process  of  set-off  or  adjustment  failed. 
If  any  individual  could  not  return  the  equivalent  of  his  debt  in 
credits  granted  by  the  bank,  he  wrould  have  to  pay  the  money : 
that  is,  the  debtors  upon  the  paper  held  by  the  bank  would  have 
to  redeem  the  credits  granted  by  the  bank  in  the  purchase  of  the 
paper,  or  else  pay  the  money  with  which  the  bank  could  redeem 
them.  This  process  of  adjustment  is  one  which  could  proceed 
as  steadily  on  the  books  of  the  bank  as  the  progress  of  industry 
and  trade.  Within  a  certain  range  it  would  require  no  money ; 
that  range  would  depend  on  the  mutuality  of  business.  So  far 
as  a  customer  of  the  bank  had  claims  upon  others  which  he  could 
apply  to  the  claims  upon  himself,  he  would  require  no  money. 
As  with  one,  so  with  all ;  so  far  as  the  customers  of  the  bank 
had  claims  upon  each  other,  no  money  would  be  required  for 
their  adjustment.  So,  as  between  nations ;  no  money  is  required 
for  payments,  except  to  pay  balances.  Doubtless,  the  fluctua 
tions  of  trade  would  have  their  effect  upon  this  process  of  adjust 
ment  ;  but,  whatever  irregularities  might  arise  from  this  cause, 
the  process  would  proceed  so  long  as  business  continued.  This 
process,  in  fact,  could  never  fail  nor  be  diminished  in  its  effi 
cacy  ;  but  would  expand  when  commerce  expanded,  and  contract 
when  commerce  contracted.  It  would  operate,  in  this  respect, 
precisely  as  it  would  between  those  who  had  been  in  the  habit 
of  dealing  largely  with  each  other  upon  the  faith  of  their  respec- 


388      EVIL    OF    TREATING    CREDITS    AS    MONET. 

tive  books  of*  account.  If  their  transactions  grew  larger,  their 
acccounts  would  only  be  longer ;  and  if  their  mutual  business 
diminished,  the  accounts  would  be  shorter.  In  either  case,  the 
process  of  adjustment  would  be  the  same,  and  equally  effectual, 
whether  the  accounts  were  long  or  short,  or  the  amounts  great 
or  small. 

When  the  Bank  of  England  undertook,  as  a  means  of  attract 
ing  business,  to  pay  bank-notes  and  credits  in  account,  issued 
for  individual  securities  not  due,  on  demand,  it  was  not  foreseen 
what  a  Pandora's  box  of  evils  was  being  opened,  to  trouble  the 
commercial  world.  The  bank  intended  no  more  than  to  offer  a 
facility  and  convenience,  which  it  was  believed  there  would  be 
no  temptation  to  abuse.  So  far  have  been  the  anticipations  of 
the  bank  from  being  realized,  that,  from  the  very  first  movement 
of  the  bank  in  this  direction,  the  public  seized  upon  the  facility 
or  convenience  as  being  the  substance  of  the  transaction,  and 
not,  as  intended  by  the  bank,  as  the  incident  or  shadow.  The 
public  at  once  looked  upon  bank-notes  and  bank  credits,  con 
vertible  on  demand  into  gold  or  silver,  as  money,  and  not,  as 
devices  of  the  credit  system,  instruments  of  adjustment.  In  this 
aspect,  bank-notes  and  bank  credits  were  a  boon,  indeed,  to  men 
of  business.  It  was  no  less  than  an  exchange  of  their  paper, 
payable  some  months  after  date,  into  that  which  was  payable  on 
demand.  Bank-notes  and  bank  credits  became  cash  —  looked 
upon  and  treated  as  money.  This  was  entirely  changing  their 
character  and  legitimate  use ;  they  should  have  been  regarded 
as  mere  instruments  of  adjustment,  having  the  same  effect  as 
books  of  account.  The  Bank  of  England,  and  all  other  banks 
of  circulation,  have  since  been  held,  as  a  matter  of  justice  to  the 
public,  to  this  convertibility  of  their  credits  and  their  notes ;  and 
the  important  distinction  between  payments  by  adjustment,  or 
setting-off  debts  against  debts,  and  payment  in  money,  has  been 
lost  from  the  mind  of  the  public. 

It  did  not  result,  in  the  case  of  the  Bank  of  England,  that 
this  giving  bank-notes  and  bank  credits,  payable  on  demand,  for 
the  paper  not  due  received  from  its  customers,  virtually  changed 
that  paper  into  money.  It  is  true,  the  bank-notes  and  bank 


TWO-FOLD    CHARACTER    OF    CREDITS.  389 

credits  became  a  currency,  with  a  circulation  and  powers  similar 
to  those  of  money.  Their  chief  utility  or  efficacy  was  not  derived 
from  their  being  payable  on  demand,  but  from  their  use  as  in 
struments  of  adjustment.  They  had,  thenceforward,  two  charac 
ters —  the  one  as  a  currency,  or  substitute  for  money;  the  other, 
as  a  means  of  adjustment.  They  were  employed  in  both  charac 
ters,  but  without  observing  the  distinction.  The  operation  of 
adjustment,  by  which  nine-tenths  of  the  debts  were  actually  dis 
charged,  was  no  longer  understood ;  and  the  whole  efficacy  of 
the  payments  was  attributed  to  the  use  of  bank-notes  and  bank 
credits,  in  their  character  of  money  or  currency.  Without  here 
estimating  the  increased  efficacy  thus  given  to  bank-notes  and 
bank  credits,  we  insist  that  their  efficiency  was  mainly  as  instru 
ments  of  adjustment.  We  have  already  explained  the  process. 
If  the  bank  had  received  a  million  sterling  of  individual  paper, 
maturing  in  an  average  of  three  months,  for  which  it  had  issued 
bank-notes  to  the  amount  of  £985,000,  these  would  be  applica 
ble  at  once  to  the  payment  of  the  individual  paper  as  it  matured, 
not  because  they  were  payable  on  demand,  but  because  they 
constituted  a  claim  upon  the  bank,  which  the  bank  would 
promptly  redeem  by  giving  up  the  paper  of  individuals  as  it  fell 
due.  The  bank,  in  this  case,  would  hold  a  claim  upon  certain 
persons  of  the  public  for  a  million,  and  certain  persons  of  the 
public  would  hold  claims  upon  the  bank  to  the  extent  of 
,£985,000.  The  bank  would  gladly  receive  this  amount  of  its 
notes,  so  far  as  they  would  reach,  in  the  payment  of  the  million 
of  securities  held  by  it.  Such  a  transaction  between  the  bank 
and  its  customers  would  require  no  help  of  coins  or  bullion ; 
they  would  not  be  needed,  and  it  would  not  be  economical  to 
use  them.  Although  the  notes  and  credits  were  convertible, 
they  were  never  for  the  purpose  of  such  payment  converted. 
The  process  of  adjustment  proceeded  in  the  same  manner,  and 
to  the  same  extent,  as  if  the  bank-notes  and  bank  credits  had 
not  been  convertible. 

We  are  not  discussing  the  question  here,  whether  such  notes 
as  the  Bank  of  England  issued  should  have  been  payable  on  de 
mand  or  not,  nor  the  restraints  and  securities  which  should  have 


890         CREDITS    WORK    BY    THEIR    OWN    LAWS. 

been  placed  upon  such  a  power :  that  is  a  separate  topic.  We 
are  considering  merely  the  processes  of  payment  as  it  may  be 
effected  by  the  notes  and  upon  the  books  of  a  bank.  We  wish 
to  show  that  the  process  of  adjustment  by  which  men  are  enabled 
to  apply  what  others  owe  to  them  in  satisfaction  of  what  they 
owe  to  others — that  is,  to  set-off  credits  against  debts — is  in  no 
way  dependent  upon  money.  It  is  a  process  corresponding  pre 
cisely  to  that  of  balancing  accounts,  or  setting-off  mutual  debts 
arising  upon  books  of  accounts.  This  balancing  of  accounts  is 
in  no  degree  dependent  upon  any  use  of  money.  When  parties 
are  willing  so  to  regard  them,  one  debt  is  as  good  as  another ; 
and,  therefore,  it  is  perfectly  proper  for  men  to  pay  debts  with 
debts :  and  this  method  is  equally  effectual  and  final,  whether 
done  by  the  aid  of  a  bank,  or  by  the  aid  of  books  of  account. 

We  are  very  far  from  saying  that  bank-notes  or  bank  credits, 
payable  on  demand,  should  not  be  paid  on  demand.  Banks,  as 
well  as  individuals,  should  be  prepared  to  pay  what  they  engage 
to  pay ;  they  should  make  no  promises  which  they  have  not  good 
reason  to  believe  they  can  fulfil  under  all  circumstances.  The 
Bank  of  England,  however,  never  was  able,  and  never  expected 
to  be  able,  to  pay  all  its  notes  and  credits,  if  payment  of  the 
whole  were  demanded.  The  belief  was,  that  it  could  pay  all  that 
would  be  demanded ;  and  one  of  the  reasons  for  promising  to 
pay  on  demand  was,  to  make  the  bank-notes  and  credits  a  cur 
rency  so  desirable  and  convenient,  that  payment  of  them  would 
not  be  demanded.  We  do  not  here,  then,  touch  the  question  of 
the  securities  which  the  Bank  of  England,  or  any  other  bank 
which  makes  such  promises,  should  give  for  their  performance. 
We  are  contending  that  the  system  of  adjusting  mutual  debts 
upon  the  books  of  a  bank,  for  which  they  are  admirably  adapted, 
should  be  allowed  to  operate  by  itself  upon  the  principles  which 
belong  to  it.  It  needs  no  aid  from  gold  or  silver;  and  there  was 
no  more  need  of  making  the  items  of  debt  and  credit  thus  ad 
justed  payable  in  specie  on  demand,  than  there  was  of  making 
every  item  of  a  book  account  payable  on  demand,  before  the 
parties  could  be  allowed  to  balance  their  books. 

Let  us  suppose  the  Bank  of  England  to  have  had  deposited  in 


CREDITS     AND     THEIR     FUNCTIONS.  391 

their  office,  for  collection,  a  million  sterling  of  business-paper, 
having  an  average  of  three  months  to  run,  and  that,  upon  appli 
cation  of  the  holders,  the  whole  is  discounted  and  credit  given  to 
them  respectively  for  the  proceeds  upon  the  books  of  the  bank ; 
and  that  this  credit  is  given  solely  for  the  purpose  of  paying 
debts  to  the  bank.  It  is  obvious  that  every  person  so  credited 
is  at  once  prepared  to  transfer  to  the  bank  so  much  of  his  credit 
as  will  satisfy  or  extinguish  his  debts  to  the  bank.  So  far  as 
the  parties  concerned  in  this  million  sterling  were  mutually  in 
debted,  they  would  be  prepared  to  meet  their  indebtedness. 
They  would  have  been  thus  furnished  with  the  most  convenient 
and  effectual  mode  of  payment  which  can  be  conceived.  Every 
man  thus  credited,  and  against  whom  the  bank  held  claims, 
would  have  it  in  his  power  to  make  his  payments  without  fail  as 
they  matured.  The  effect  of  this  operation  would  have  been  very 
much  the  same  as  if  the  bank  had  simply  charged  each  customer 
with  his  portion  of  the  indebtedness,  and  credited  him  with  the 
paper  discounted  for  him.  This  would  have  been  the  substance 
of  the  transaction  as  a  whole,  and  it  would  have  effectually  dis 
charged  all  the  mutual  indebtedness  involved  in  the  million  ster 
ling,  which  would  have  been,  according  to  the  course  of  business, 
not  less  than  two-thirds  to  nine-tenths  of  the  whole. 

This  very  beautiful,  effective  and  simple  process  of  extinguish 
ing  debts  was  complicated,  sadly  and  disastrously,  by  the  ill- 
considered  practice  introduced  by  the  Bank  of  England.  It  is 
true  that,  by  means  of  bank-notes  and  bank  credits,  the  process 
of  adjustment  could  go  on  effectively,  whether  the  notes  or  credits 
were  payable  on  demand  or  not ;  but  the  public  gradually  took 
up  the  opinion,  that  the  availability  of  the  bank-notes  and  bank 
credits  depended  upon  their  convertibility  into  gold  or  silver. 
This  was  overlooking  the  whole  process  of  adjustment,  the  power 
of  which  was  far  greater  than  any  possible  employment  of  gold 
and  silver.  The  distinction  between  the  agency  of  coins  and  the 
process  of  adjustment  being  lost  sight  of,  it  was  assumed  that 
the  precious  metals,  or  money,  was  the  basis  of  this  most  effective 
means  of  settling  debts.  The  next  step  was,  that  bank-notes 
and  bank  credits  being,  by  this  assumption,  based  on  money,  or 


392    MONEY   NOT    THE    CRITERION    OF    CURRENCY. 

the  precious  metals,  the  issue  of  bank-notes  and  bank  credits 
should  be  strictly  regulated  by  the  amount  of  coins  which  could 
be  kept  on  hand  to  redeem  them.  It  was  pretty  generally  in 
sisted  that  the  Bank  of  England  should  keep  on  hand  one-third 
enough  of  specie  to  redeem  its  notes  and  credits,  on  the  presump 
tion  that  more  would  never  be  demanded.  This  doctrine  was 
maintained  and  pressed  upon  the  bank  for  more  than  a  century. 
Its  influence,  so  far  as  it  prevailed,  on  the  minds  of  the  people 
and  the  government  was,  in  some  respects,  extremely  injurious 
to  individual  and  commercial  interests.  It  assumed,  as  the  crite 
rion  of  the  quantity  of  bank-notes  and  bank  credits  to  be  issued, 
the  quantity  of  money  in  a  country,  instead  of  the  amount  of  the 
exchanges  of  commodities.  Manufacturers  and  merchants  pur 
chase  and  sell  commodities,  and  give  and  take  their  own  notes 
in  settlement  of  the  amount  of  debts ;  and  they  do  this  without 
having  one-third,  or  even  one-hundredth,  of  enough  specie  on 
hand  to  make  final  payment,  and,  indeed,  without  thinking  of 
any  payment  in  specie ;  for  it  is  the  rarest  thing  in  the  world 
for  any  merchant  or  manufacturer  ever  to  exact  payment  of  a 
debt  in  gold  or  silver.  It  is  enough  for  these  men,  that  they  can 
purchase  with  their  own  paper,  and  sell  for  the  paper  of  others, 
which  can  be  applied  to  pay  their  own. 

The  business  of  England  in  the  17th  century,  as  it  is  now, 
was  carried  on,  in  its  large  operations,  upon  the  credit  of  indi 
viduals  who  issued  their  own  paper  for  all  purchases,  and  received 
it  for  all  sales.  It  is  upon  the  paper  thus  issued,  that  the  busi 
ness  of  banks  of  circulation  is  founded.  This  individual  paper 
is  not  based  upon,  nor  regulated  by,  the  quantity  of  money  in 
circulation,  nor  would  there  be  any  propriety  in  its  being  so 
regulated.  Before  the  Bank  of  England  was  established,  there 
were  always  modes  of  effecting  payments  of  this  private  paper, 
to  a  large  extent,  without  money.  The  great  point  aimed  at,  in 
regard  to  payment  of  this  paper,  was  not  to  procure  money  to 
pay  it,  but  to  pay  it  without  resort  to  gold  or  silver.  The  busi 
ness  was  not  to  be  regulated  by  gold  and  silver,  but  by  the  in 
dustry  and  energies  of  the  people,  and  their  facilities  for  trans 
portation  and  consumption.  The  whole  exchange  of  commodi- 


MACHINERY    OF    PAYMENT.  393 

ties,  and  their  entire  distribution,  previous  to  the  final  operation 
of  the  retail  trade,  move  on  in  the  regular  channels,  whilst  the 
payments  are  reserved  for  a  special  and  separate  department  of 
business. 

As  the  trade  of  a  country,  foreign  or  domestic,  is  not  de 
pendent  upon  the  precious  metals,  so  neither  are  the  payments. 
It  is  obvious  to  all  who  know  anything  of  the  movements  of 
trade,  or  the  processes  of  payment  in  the  large  way,  that  neither 
the  one  nor  the  other  are  carried  on  by  means  of  gold  or  silver. 
Prices  are  all  expressed  in  money  of  account ;  the  sums  named 
in  bills  of  exchange,  promissory  notes,  bank-notes  and  books  of 
account,  are  all  expressed  in  money  of  account ;  finally,  all  debts 
and  credits  are  so  expressed.  What  is  required,  in  the  processes 
or  machinery  of  payment,  is,  that  they  should  be  commensurate 
in  power  with  the  work  to  be  done.  As  so  few  payments  are 
actually  made  in  gold  or  silver,  it  is  evident  that  they  are  not 
regarded  as  adequate  to  the  task  to  be  accomplished.  Their 
agency  is  now  restricted  to  the  retail  trade,  and  to  the  payment 
of  balances  in  the  foreign  and  domestic  trade.  Their  use  in  the 
banks  is  purely  precautionary,  and.  as  a  security  to  the  public 
against  over-issue,  and  for  payment  of  balances  between  banks. 
The  great  payments  of  trade  are  not  effected,  directly  nor  indi 
rectly,  by  means  of  the  precious  metals.  Out  of  the  retail  trade, 
they  are  mere  commodities,  the  supply  and  use  of  which  is  regu 
lated  by  the  demand  for  them,  and  the  means  of  purchasing 
them.  The  machinery  and  processes  of  payment  have  very  little 
necessary  or  actual  connection  with  the  precious  metals,  whether 
in  the  shape  of  coins  or  bullion. 


394  SUSPENSION    OF    PAYMENTS. 


\  4.  The  Bank  of  England  suspends  payments  from  1797  to  1822 — 
Order  of  suspension  by  Privy  Council —  Opposition  to  the  measure  — 
Terms  of  suspension  —  Dates  of  extensions  —  Position  and  progress  of  the 
country  during  suspension  —  Dissatisfaction  —  Lord  King  —  Converti 
bility —  Efficacy  of  payments — Processes  of  payment  the  same  during  sus 
pension  as  before —  The  real  basis  of  bank  issues,  the  commodities  of  trade 
—  The  credit  system  —  Controversy  as  to  the  depreciation  of  bank-notes 
during  the  suspension  —  Bullion  Report  of  1810  —  Bullionists  and  anti- 
BuUionists —  Opinion  of  Tooke  in  History  of  Prices —  Table  of  prices  of 
gold  and  silver,  and  amount  of  circulation,  from  1797  to  1821. 

We  are  not  assuming  to  give  a  history  of  the  Bank  of  Eng 
land,  nor  even  the  merest  sketch,  but  only  such  features  of  its 
business  as  may  serve  to  exhibit  its  agency  in  the  great  work 
of  commercial  payments.    One  of  the  most  remarkable  events  in 
the  history  of  the  bank  was  its  suspension  of  payment  in  1797 — 
a  suspension  prolonged  for  upwards  of  twenty-five  years.     This 
suspension  itself  deserves  a  history,  to  which  justice  has  never 
been  done.     It  was,  without  doubt,  made  necessary  by  the  im 
mense  advances  made  to  the  government  during 'the  wars  and 
continental  troubles  consequent  upon  the  French  Revolution. 
The  commercial  disturbances  of  the  time  were  scarcely  less  than 
the  political,  and  both  operated  severely  upon  the  bank.     The 
advances  to  the  government  were,  however,  quadruple  the  dis 
counts  afforded  to  commerce.     This  caused  inability  to  furnish 
the  needful  facilities  to  industry  and  commerce,  and  increased 
the  distrust  which  the  state  of  affairs  at  home  and  abroad  was 
calculated  to  awaken.     Early  in  the  year  1797,  which  was  the 
year  after  the  attempted  invasion  of  England,  a  steady  drain 
carried  off  the  specie  from  the  bank  at  such  a  rate,  that  in 
February  the  directors  became  thoroughly  alarmed,  and  laid  the 
facts  before  Mr.  Pitt.     He  brought  the  subject  at  once  before 
the  Privy  Council ;  he  had  suggested  to  the  authorities  of  the 
bank,  that  it  might  be  expedient  for  the  government  to  restrain 
the  further  payment  of  specie,  to  examine  carefully  the  condi 
tion  of  the  bank,  and  to  give  its  notes  the  benefit  of  a  public 
guarantee.     The  Council  met  on  the  25th  of  February,  1797, 
and  determined,  in  consequence  of  the  "unusual  demands  for 


OPPOSITION    IN     PARLIAMENT.  395 

specie  that  have  been  made  upon  the  metropolis,  proceeding 
from  unfounded  or  exaggerated  alarms,"  .  .  .  "  that  it  is  in 
dispensably  necessary  for  the  public  service,  that  the  Directors 
of  the  Bank  of  England  should  forbear  issuing  any  cash  in  pay 
ment,  until  the  sense  of  Parliament  can  be  taken  on  that  sub 
ject."  This  mandate  of  the  Privy  Council  was  obeyed,  and  pay 
ments  in  specie  ceased  on  the  27th  of  February,  1797. 

A  large  meeting  of  bankers  and  merchants  of  London  was 
held  the  same  day,  over  which  the  Mayor  presided,  at  which 
they  resolved  unanimously  that  they  would  not  refuse  to  take 
bank-notes  in  payment  of  any  sums  of  money  to  be  paid  to  them, 
and  that  they  would  use  their  utmost  endeavors  to  make  all 
their  payments  in  the  same  manner.  Some  alarm,  but  no  special 
excitement,  ensued  among  people  thus  suddenly  arrested  in  their 
run  upon  the  bank.  The  Opposition  in  Parliament  did  not  per 
mit  so  good  an  opportunity  to  pass,  without  employing  this  as  a 
weapon  against  the  government.  Fox,  Sheridan  and  Pulteney 
made  violent  speeches  against  the  bank,  and  the  policy  of  sus 
pension.  Mr.  Fox  said,  "  the  measure  had  destroyed  the  credit 
of  the  bank ;"  that  it  was  equivalent  to  "seizing  the  money  of 
individuals."  Mr.  Sheridan  said  he  "considered  it  a  farce  to 
call  that  a  bank,  whose  promise  to  pay  on  demand  was  met  by 
another  promise  to  pay  at  some  indefinite  period.  It  was 
ridiculous  to  think  of  placing  confidence  in  paper  upon  any  prin 
ciple  but  that  of  its  being  paid  when  it  became  due."  Pulteney 
submitted  to  the  House  of  Commons  a  bill  for  the  erection  of  a 
new  bank,  in  case  the  Bank  of  England  did  not  pay  specie  on 
the  24th  of  June,  1797,  "  or  within  four  months  from  the  day 
of  suspension."  But  this  outcry  and  opposition  proved  power 
less  against  the  exigencies  of  the  time ;  the  bankers,  merchants 
and' people  supported  the  government.  The  policy  of  non-pay 
ment,  which  at  first  startled  Mr.  Pitt,  was  by  him  afterwards 
declared  to  be,  in  the  peculiar  circumstances  of  necessity  in 
which  the  government  was  then  placed,  like  "finding  a  mountain 
of  gold." 

On  the  3d  of  March,  1797,  immediately  following  the  suspen 
sion,  the  bank  was  authorized  to  issue  £1  and  £2  notes ;  and 


396  BANK    RESTRICTION    ACT    OF    1797. 

some  Spanish  dollars  were  issued  for  the  same  purpose  of  fur 
nishing  change.  The  bank  had  not  for  twenty  years  issued  notes 
under  £5.  On  the  3d  of  May,  the  Bank  Restriction  Act  passed, 
being  "An  Act  for  continuing  for  a  limited  time  the  restriction 
contained  in  the  minute  of  Council,  of  the  26th  of  February, 
1797,  of  payment  in  cash  by  the  bank."  It  indemnified  the 
bank  for  the  suspension,  prohibited  the  payment  of  specie,  except 
for  sums  under  20  shillings,  but  allowed  depositors  of  ,£500 
in  specie  to  withdraw  three-fourths  of  the  amount.  The  bank 
was  permitted  to  advance  to  the  private  bankers  of  London  any 
sum  in  specie  not  exceeding,  in  the  whole,  £100,000,  and 
.£25,000  each  to  two  banks  in  Scotland.  The  bank  was  not  to 
be  sued  for  the  non-payment  of  any  note  for  which  they  were 
willing  to  give  other  notes ;  and  no  person  could  be  held  to  spe 
cial  bail  for  any  debt,  for  which  he  had  tendered  payment  in 
notes  of  the  Bank  of  England.  This  act  was  to  be  in  force  52 
days,  until  the  24th  of  June.  On  the  22d  of  June,  an  act  was 
passed,  continuing  suspension  until  one  month  after  the  com 
mencement  of  the  next  session  of  Parliament.  In  November,  1797, 
a  third  act  was  passed,  continuing  the  suspension  until  six  months 
after  the  end  of  the  war.  In  1802,  after  the  truce  of  Amiens, 
the  restriction  was  again,  by  act  of  Parliament,  continued  until 
March,  1803.  Two  acts  passed  in  1803,  on  the  subject  of  the 
restriction,  and  the  one  of  December  continued  it  until  six  weeks 
after  a  definitive  treaty  of  peace.  This  did  not  occur  until  1815, 
and  then  another  act  until  1816,  when  it  was  continued  to  1818, 
and  thence  to  July,  1819.  It  was  only  continued  from  this  date 
to  February  1st,  1820.  This  last  continuation  was  contained  in 
Peel's  Bill,  providing  for  the  resumption  of  specie  payments  by 
degrees,  beginning  on  the  1st  of  October,  1820,  and  reaching 
full  payment  on  the  1st  of  May,  1823.  These  continuation^  by 
law  of  the  restriction  show  that  the  subject  was  before  the  people 
for  upwards  of  twenty-five  years. 

This  was  an  eventful  period  of  the  history  of  Great  Britain, 
distinguished  alike  for  progress  in  arts  and  arms,  in  industry 
and  commerce.  The  great  agent  of  British  finance,  during  this 
long  struggle,  and  this  wonderful  series  of  successes,  was  the 


PROGRESS    OF    THE    NATION.  397 

Bank  of  England.  At  the  date  of  the  suspension,  its  stock  of 
specie  had  been  reduced  to  .£1,086,000.  The  country  was  then 
apprehensive  of  an  invasion  by  the  hitherto  invincible  Napoleon, 
and  alarm  was  prevalent.  The  war  had  already  proved  burden 
some,  and  heavy  loans  had  been  negotiated.  The  revenue  of  the 
United  Kingdom  had  grown  from  £19,258,000  sterling,  in  1792, 
to  £23,126,000,  in  1797;  the  public  debt  of  £261,735,000  had 
about  doubled  itself  at  the  date  of  suspension.  To  give  some 
idea  of  the  difficulties  encountered  by  the  nation  during  the  sus 
pension,  we  furnish  the  following  statements  :  — 

The  public  revenue,  which,  as  just  mentioned,  was  £23,126,000 
in  1797,  increased  steadily  to  £72,210,000  in  1815,  and  stood 
at  £54,282,000  in  1820. 

The  amount  raised  by  loan  and  taxation,  during  that  time, 
was  never  less  in  any  year  than  £47,362,000  ;  during  nine  years 
it  was  over  £70,000,000;  and  for  the  years  1813  and  1814,  it 
was,  respectively,  £108,397,000  and  £105,698,000. 

During  the  suspension,  loans  were  negotiated  for  the  govern 
ment  to  the  amount  of  £350,000,000.  In  January,  1816,  the 
public  debt  had  reached  the  sum  of  £88^,186,000. 

In  this  trying  period,  the  bank  made  advances  to  the  govern 
ment,  in  anticipation  of  the  public  revenues  every  year,  from 
£10,000,000  to  £28,000,000,  besides  being  the  chief  agent  in 
negotiating  and  funding  over  £100,000,000.  The  specie  in  the 
bank  increased,  in  1798,  to  nearly  £6,000,000;  in  1799,  it 
reached  £7,564,000.  It  then  decreased,  until,  in  the  years 
1813, 1814  and  1815,  it  had  fallen  to  very  little  over  £2,000,000. 
It  fluctuated  greatly  down  to  the  year  of  resumption,  having 
been  as  high  as  £10,000,000  in  1818,  and  as  low  as  £4,185,000 
in  1819. 

The  circulation  of  the  bank,  in  1796,  £10,730,000,  had  been 
reduced  more  than  a  million  before  the  suspension  took  place  in 
February,  1797.  It  was  then  gradually  increased  to  its  maxi 
mum  of  over  £27,000,000,  from  1815  to  1818 ;  in  1822,  the 
year  of  full  resumption,  it  was  £18,665,000.  The  deposits  of 
the  bank  were  £4,892,000  in  1797,  being  then  more  than  a 
million  below  the  average  of  the  preceding  ten  years.  They 


398  PROGRESS    OF    THE    NATION. 

fluctuated  greatly  during  the  succeeding  twenty  years,  the 
highest  being  over  £12,000,000  in  four  different  years,  and  not 
falling  to  £6,000,000  until  1820,  when  they  were  at  £4,094,000. 
After  this,  up  to  the  year  1844,  they  had  not  reached  £14,000,000. 

Three  millions  of  acres  of  land,  hitherto  unimproved,  were  in 
closed  and  brought  under  cultivation  during  this  period  of  sus 
pension. 

In  1801,  the  quantity  of  cotton  imported  was  54,000,000 
pounds;  in  1822,  it  was  143,000,000  pounds.  The  manufac 
tured  cotton  goods  exported  in  1801  were  of  the  official  value 
of  £7,000,000;  in  1822,  of  £27,000,000. 

Between  1797  and  1814,  upwards  of  £37,000,000  of  subsidies 
were  paid  by  Great  Britain  to  her  continental  allies,  for  their 
assistance  in  the  war. 

But  we  need  not  multiply  figures,  to  show  that  the  period  of 
the  suspension  of  specie  payments  in  Great  Britain  was  one  of 
great  progress  in  wealth,  industry,  commerce  and  power,  not 
withstanding  all  the  disadvantages  of  an  inconvertible  paper 
currency,  the  vast  expenditure  of  the  war,  and  the  great  bur 
den  of  taxation.  After  speaking  of  this  eventful  period  of 
British  history,  in  which  the  nation  surmounted  so  many  diffi 
culties,  and  finally  came  off  conqueror  in  a  contest  with  the  most 
powerful  and  the  most  skilful  commander  the  world  has  ever 
known,  a  recent  historian  of  the  Bank  of  England  says :  — 
"  These  things  are  not  written  to  defend,  they  are  only  penned 
to  mitigate  the  wrath  which  has  been  poured  upon  the  Bank 
Restriction  Act.  Extraordinary  events  require  extraordinary 
measures ;  and  our  history,  from  1797  to  1815,  is  unsurpassed 
in  the  annals  of  nations."1 

But  whatever  may  be  urged  by  the  enemies  of  the  Bank  Re 
striction  Act  in  their  "wrath,"  the  friends  of  commercial  credit 
may  well  claim  that  the  achievements,  during  a  quarter  of  a  cen 
tury  of  suspension,  deserve  to  be  faithfully  studied  and  well 
understood.  It  is  a  fact  that,  during  this  period,  a  vast  revenue 
of  hundreds  of  millions  of  dollars  was  paid  by  the  people,  and 
hundreds  of  millions  of  dollars  were  raised  by  public  loans  every 


1  History  of  the  Bank  of  England,  by  John  Francis,  vol.  i.f  p.  252. 


OPPOSITION    TO    THE    RESTRICTION.  399 

year,  between  179T  and  1815;  that  thousands  of  millions  of 
dollars  of  commercial  debts  were  paid  every  year  of  the  suspen 
sion,  with  little  or  no  intervention  of  the  precious  metals  —  facts 
which  deserve  a  better  explanation  than  has  ever  been  given.  If 
the  countless  millions  of  dollars  of  debts  discharged  during  this 
quarter  of  an  age  of  paper  money  be  well  and  sufficiently  paid, 
it  should  certainly  be  understood  upon  what  principles  it  could 
be  done. 

There  was,  doubtless,  in  many  minds,  during  all  this  period 
of  inconvertible  bank-notes,  a  vague  feeling  that  these  payments 
were,  after  all,  indebted  for  their  effectiveness  to  some  secret 
power  of  the  precious  metals.  The  bank-notes  carried  on  their 
face  a  promise  to  pay  a  certain  number  of  pounds  sterling,  and 
although  these  pounds  were  never  paid  in  gold  or  silver^  yet  the 
promise  was  there,  and  the  promise,  for  the  time,  was  taken  for 
the  performance.  The  efficacy  of  current  payments  was  seldom 
attributed  to  the  working  of  the  credit  system,  where  it  be 
longed  ;  and  a  few,  at  least,  considered  themselves  deeply 
wronged,  because  they  could  not,  at  pleasure,  convert  their 
bank-notes  into  specie.  The  fact  thai;  an  intense  demand  for 
gold  on  the  continent,  arising  from  the  wars  and  disturbances 
prevailing  there,  had  enhanced  the  price  of  gold  everywhere,  did 
not  escape  the  notice  of  those  opposed  to  a  paper  currency,  and 
this  increased  their  "wrath."  They  regarded  themselves  as 
injured  to  the  extent  of  this  increased  price  of  gold,  upon  every 
pound  that  passed  through  their  hands.  They  scouted  and  despised 
the  very  currency  by  which  the  business  and  government  of  the 
United  Kingdom  were  carried  on,  and  to  which,  whatever  may 
have  been  its  faults,  the  people  and  government  were  at  that 
juncture  .under  infinite  obligations.  One  of  the  most  distin 
guished  of  these  objectors,  Lord  King,  in  despite  and  contempt 
of  the  law  which  gave  his  tenants  the  right  to  pay  their  rents  in 
bank-notes,  served  a  formal  notice  upon  them  to  pay  their  dues 
in  gold.  He  published  a  pamphlet  overflowing  with  arguments 
against  the  suspension,  and  with  solemn  reproof  for  the  wrong 
done  to  people  who  were  obliged  to  receive  and  pay  bank-notes, 
at  par  with  silver. 


400  SUMMARY    OF    CEEDIT    SYSTEM. 

We  need  not  explain  at  length  here,  what  we  have  so  fully 
explained  elsewhere  in  this  volume,  that  the  payments  of  Great 
Britain,  during  the  period  of  suspension,  did  not  derive  any  part 
of  their  efficacy  from  the  precious  metals,  nor  from  the  promise 
to  pay — a  promise  not  performed,  nor  intended  to  be  performed. 
The  efficacy  of  the  payments,  during  a  period  of  suspension, 
rested  upon  the  same  principles  which  make  payments  efficacious, 
when  bank-notes  and  bank  credits  are  convertible.  The  object 
of  convertibility  not  being  to  make  payments  by  notes  and  checks 
upon  deposits  valid,  but  to  be  a  security  against  over-issues,  and 
other  abuses  in  banking.  The  fact  that  gold  or  silver  can  be 
obtained  for  notes,  adds  nothing  to  the  validity  of  payment  in 
the  notes :  if  the  parties  concerned  are  willing  to  pay  and 
receive  notes  in  payment  for  goods  or  debts,  it  matters  not  to 
the  validity  of  the  transaction  whether  the  notes  are  convertible 
or  not.  So  far  as  convertibility  is  concerned,  it  is  a  question  of 
public  policy ;  a  question  whether  any  bank  can,  with  safety  to 
the  public,  be  permitted  to  issue  notes  as  currency  upon  any 
other  security  than  payment  of  the  notes  thus  issued  in  demand 
in  gold  or  silver.  We  are  not  now  discussing  that  subject. 

Nearly  the  whole  business  of  every  civilized  country,  except 
the  merest  retail  trade,  is  carried  on,  in  the  first  instance,  upon 
personal  credit.  Purchases  in  the  large  way  are  made  neither 
with  the  precious  metals,  nor  with  bank-notes,  but  upon  the 
security  of  promissory  notes,  bills  of  exchange,  and  other  like 
securities.  These  securities,  whatever  their  form,  and  whatever 
they  promise,  are  expressed,  like  the  entries  in  merchants'  books, 
in  money  of  account.  They  are  evidence  of  the  amount  of 
credit,  and  of  course  of  the  amount  of  debt.  The  issue  of  these 
securities  accomplishes  a  movement  of  commodities  to  the 
value  which  they  represent.  The  next  step,  is  the  payment  or 
discharge  of  these  obligations.  The  parties  who  have  purchased 
have  the  commodities,  the  parties  who  have  sold  have  the  secu 
rities.  But  the  holders  of  securities  are  themselves  debtors  for 
the  amount  of  other  securities  issued  by  them  for  the  purchase 
of  the  very  goods  they  sold.  Thus  a  great  mass  of  business  men 
transact  a  vast  amount  of  business  by  the  issue  of  their  own 


RESULTS    OF    CREDIT    SYSTEM.  401 

paper.  It  becomes  a  prime  object  of  every  one  of  these  men  to 
apply  his  credits  to  pay  his  debts.  They  all  go  to  the  bank, 
and  have  their  securities  converted  into  bank-notes  or  bank 
credits.  The  bank  becomes  the  holder  of  the  securities  for 
which  it  has  issued  notes  or  credits.  The  bank  gives  nothing 
for  these  securities  but  its  own  paper  promises  or  credits,  and 
these  to  an  amount  less  the  discount.  The  debtor  in  any  of  the 
securities  held  by  the  bank  has  only  to  pay  the  bank  in  its  own 
issues  —  the  very  currency  in  which  the  bank  paid  for  the  secu 
rities.  In  this  way,  the  whole  of  the  debts  can  be  paid,  and  the 
whole  of  the  securities  can  be  discharged  and  retired  by  the 
parties  who  issued  them.  There  is  an  indebtedness  to  the  bank 
to  a  larger  amount  than  the  issues  of  the  bank,  and  there  is  a 
constant  daily  effective  demand  for  the  issues  of  the  bank,  whe 
ther  notes  or  credits,  by  parties  who  must  constantly  and  daily 
meet  their  debts  maturing  in  the  bank.  There  is,  in  commercial 
countries  like  Great  Britain  and  the  United  States,  no  other 
article  so  extensively  in  demand  as  bank-notes  and  bank  credits, 
for  the  purpose  of  discharging  debts  payable  in  bank.  Such 
debtors  never  look  for  gold  or  silver  to  pay  these  debts;  it 
would  be  utterly  in  vain.  • 

It  is  evident,  then,  that  the  process  of  payment  is  the  same, 
whether  the  banks  are  in  a  state  of  suspension  or  not.  This 
process  is  effective,  rapid  and  economical,  because  it  does  not 
require  any  aid  whatever  from  the  precious  metals.  The 
restraints  which  the  law  imposes  upon  banks,  and  the  securities 
it  requires  for  their  good  behavior,  have  nothing  to  do  with  the 
nature  and  efficacy  of  the  process,  further  than  to  secure  the 
faithfulness  of  the  servants,  and  the  proper  working  of  the  ma 
chinery  by  which  the  payments  are  accomplished. 

In  reference  to  the  mode  and  progress  of  payment  during  the 
period  of  suspension,  we  have  made  our  remarks  general,  because 
they  apply  to  any  banks  of  circulation  in  a  state  of  suspension, 
as  well  as  the  Bank  of  England.  "VVe  have  already  explained, 
in  the  chapter  on  bank-notes,  how  they  fulfil  the  functions  of  a 
medium  of  exchange,  circulating  like  money ;  and  in  the  chapter 
on  deposits  we  have  explained  how  they  were  employed  in  pay- 
26 


402  BANK    CURRENCY. 

ments.     At  the  hazard  of  some  repetition,  we  shall  add  some 
thing  here. 

Notes  of  the  Bank  of  England  bear  on  their  face  a  certain 
value,  expressed  in  money  of  account,  and  a  promise  to  pay  that 
amount  on  demand.  This  promise  is  not  what  gives  currency 
and  efficacy,  for  performance  is  only  exacted  in  times  of  panic. 
The  real  efficacy  of  the  notes  proceeds  from  this,  that  so  large 
a  proportion  of  business  men  are  either  indebted  to  the  bank,  or 
are  indebted  to  those  who  owe  the  bank,  that  the  notes  are  in 
great  demand  at  the  amounts  expressed  on  their  face ;  for  this 
amount  they  can  be  used  to  extinguish  debts  in  the  bank  as 
effectually  as  gold  itself.  But  the  notes  are  not  dependent  for 
their  currency  upon  this  general  demand.  There  is  a  special 
demand  of  greater  potency.  The  debtors  of  the  bank  are  not 
merely  men  of  business,  whose  paper  has  been  discounted  by  the 
bank ;  they  are  men  of  business,  who,  upon  their  own  credit, 
.and  with  their  own  paper,  have  purchased  commodities  suitable 
for  general  consumption.  It  is  their  business  thus  to  purchase 
and  sell,  and  as  a  body  they  hold  the  chief  articles  of  general 
and  regular  consumption.  What  they  have  to  sell,  others  are 
obliged  to  buy.  The  bank  holds  the  individual  paper  with  which 
these  commodities  were  purchased,  and  the  debtors  hold  the  com 
modities  the  people  want.  These  debtors  of  the  bank,  then,  are 
not  the  only  persons  who  need  the  bank-notes  with  which  to  pay 
their  debts,  but  they  are  the  holders  of  the  very  articles,  for  the 
purchase  of  which  money  would  otherwise  have  to  be  paid.  The 
process,  then,  is,  that  men  with  their  individual  paper  purchase 
commodities ;  the  bank  purchases  this  individual  paper  by  the 
issue  of  its  own,  or  bank-notes ;  the  people  among  whom  these 
bank-notes  circulate,  purchase  with  them  the  commodities  in  the 
hands  of  the  debtors  of  the  bank.  The  real  basis  of  this  issue 
of  bank-notes  is  the  commodities  purchased  with  the  discounted 
individual  paper.  These  commodities  are  sold  to  redeem  that 
paper ;  the  people  need  these  articles,  and  must  have  them ; 
they  do  not  need  gold,  and  can  do  wholly  without  it.  The  basis 
of  banking,  then,  is  this  individual  paper,  and  the  basis  of  this 
paper  is  the  commodities  it  purchased.  The  whole  process  is 


CIRCULATION    OF    BANK-NOTES.  403 

carried  on  by  an  expression  of  prices  and  amounts  in  money  of 
account.  The  bank-notes  may  and  do  circulate  widely  among 
those  who  do  not  employ  them  in  the  purchase  of  commodities  ; 
but  they  will  constantly  and  finally  tend  towards  the  bank,  be 
cause  this  consumption  of  commodities  is  a  great  and  never-ceasing 
operation,  and  all  must  contribute  to  it ;  the  bank-notes  must 
always  maintain  their  value,  because  so  many  must  have  them 
or  money. 

If  a  flour  dealer  in  Liverpool  gives  his  note  to  B.  S.  &  Co.  for 
£1000  for  1000  barrels  of  American  flour,  and  B.  S.  &  Co.  send 
that  note  to  the  Bank  of  England  for  discount,  and  receive  the 
proceeds  in  notes  of  the  bank,  it  is  plain,  whether  the  notes  thus 
received,  or  the  notes  of  a  Liverpool  bank,  are  circulated  in 
their  place,  that  an  instrument  or  medium  of  exchange  has  been 
put  in  circulation  that  will  purchase  that  flour,  whether  the  notes 
circulated  are  at  the  time  payable  in  gold  or  not.  It  is  enough 
for  the  flour  dealer  that  he  can  pay  his  debt,  and  withdraw  his 
note  from  the  bank,  with  the  bank-notes ;  and  it  is  enough  for 
the  people  that  they  can  purchase  flour  with  the  bank-notes,  on 
as  good  terms  as  with  money.  The  process  would  be  the  same, 
whether  the  bank  was  suspended  or  not. 

A  dealer  in  cotton  may  give  his  note  to  an  American  shipper 
for  £1000  for  cotton ;  the  Liverpool  dealer  may  sell  it  to  a  Man 
chester  manufacturer,  taking  his  note  for  £1050 ;  it  may  be 
manufactured  into  a  variety  of  goods,  and  sold  for  £1500  to  a 
merchant  of  London,  for  which  his  note  is  taken.  If  these  indi 
vidual  notes  were  all  discounted  at  the  Bank  of  England,  and 
the  proceeds  placed  to  their  credit  respectively,  it  is  obvious, 
without  pursuing  the  cotton  further,  that  the  Liverpool  dealer 
would  be  in  funds  to  pay  the  £1000  to  the  importer  of  the  cot 
ton,  and  the  manufacturer  would  be  in  funds  to  pay  the  £1050 
to  the  dealer ;  and  these  payments  would  neither  require  gold, 
nor  be  less  effectual  than  if  made  in  gold.  The  substance  of  the 
transaction  is,  that  the  first  purchaser  of  the  cotton  paid  his  debt 
by  selling  it,  and  the  manufacturer  did  the  same  thing.  This  is, 
in  fact,  the  main  process  of  the  credit  system.  Men  purchase, 
and  give  their  promises  to  pay ;  they  sell,  and  take  promises  to 


404  BULLION    REPORT    OF    1810. 

pay ;  the  bank  enables  them  to  apply  those  they  take  in  pay 
ment  of  those  they  have  given.  Commodities,  in  the  large  trans 
actions  of  business,  pay  for  commodities  ;  and  the  credit  system 
is  that  by  which  the  books  are  kept,  the  securities  taken,  and 
the  payments  finally  adjusted.  The  currency  furnished  by  the 
bank  affords  a  facility  of  constant  use  and  application  in  the 
retail  business,  which  is  thus  connected  with  the  larger  transac 
tions  :  that  is,  the  breaking  up  the  larger  notes  of  the  wholesale 
operations,  by  exchanging  them  at  bank  for  notes  or  deposits, 
furnishes  the  currency  by  which  business  in  detail  is  carried  on 
with  increased  facility  and  despatch. 

A  very  remarkable  controversy  arose,  about  midway  of  the 
long  bank  suspension  of  England.  The  great  demand  for  gold, 
for  the  military  expedition  of  the  continent,  exhibited  itself,  in 
1810,  in  an  apparent  difference  between  gold  and  bank-notes,  of 
about  15  to  20  per  cent.  This  was  regarded  as  intolerable  by 
those  who  were  afterwards  called  Bullionists.  The  subject  was 
brought  before  Parliament,  and  gave  rise  to  the  celebrated 
Bullion  Report  attributed  to  Francis  Horner  and  William  Hus- 
kisson,  both  young  men  of  eminent  abilities  and  promise,  but  not 
so  well  versed  in  the  subject  of  banking  and  finance  as  some  of 
the  merchants  and  bankers  whose  opinions  they  disregarded  in 
their  Report.  The  Report  insisted  strongly  upon  the  deprecia 
tion  of  bank-notes  as  the  cause  of  the  difference  between  gold 
and  bank-notes.  The  subject  was  ably  discussed  in  the  House 
of  Commons.  The  decision  of  the  House  was  against  the  resump 
tion  of  specie  payments.  The  discussion  was  continued  after 
wards  for  many  years,  in  journals,  pamphlets  and  books,  with 
great  earnestness,  talent  and  practical  knowledge.  It  is  not 
even  now  settled  to  the  satisfaction  of  all  who  take  an  interest  in 
the  subject ;  Bullionists  and  Anti-bullionists  stand,  to  this  day, 
arrayed  against  each  other,  with  as  little  appearance  of  agree 
ing  as  they  exhibited  forty-five  years  ago.  The  question  is,  in 
fact,  as  interesting  as  it  was  then,  and  the  discussion  as  in 
structive.  As  usual  in  such  cases,  there  was  much  truth  and 
soundness  in  the  statements  and  arguments  on  both  sides. 

On  a  view  of  the  whole  controversy  at  this  remote  period,  and 


BULIONISTS    AND    ANTI-BULLIOXISTS.         405 

from  this  side  of  the  Atlantic,  where  there  has  been  no  excite 
ment  on  the  subject,  it  strikes  us  that  the  advantage  in  this  dis 
pute  is  with  the  Anti-bullionists,  who  insisted  that  gold  had  risen 
in  price,   and  that  there  was  no  considerable  depreciation   of 
bank-notes.     The  Bullionists,  believing  that  all  prices  are  ex 
pressed  in  gold,  and  believing,  with  Locke,  that  a  pound  of  gold 
or  silver  must  always  be  worth  a  pound  of  gold  or  silver,  and 
that,  therefore,  the  apparent  variation  in  price  of  gold  was,  in 
fact,  only  a  variation  in  the  price  of  bank-notes,  it  was  only 
necessary  for  them  to  exhibit  the  table  of  the  prices  of  gold  ex 
pressed  in  paper,  to  prove  their  case.     From  this  point  men 
could  not  be  driven,  who  could  not  conceive  of  gold  rising  and 
falling  in  price.     They  did  not  know  that  prices  are  never  ex 
pressed  either  in  gold  or  silver,  nor  in  bank-notes,  but  always  in 
money  of  account,  which  is  capable  of  expressing  and  registering 
the  fluctuations  in  the  price  of  gold  or  silver,  as  of  cotton  or 
wheat.    This  fact  alone  disturbs  the  main  position  of  the  Bullion 
ists,  and  compels  them  to  look  elsewhere  for  the  solution  of  the 
difficulty.     According  to  their  own  views,  the  depreciation  of 
bank-notes  should  have  been  expressed  in  the  language  of  trade, 
as  so  many  per  cent,  below  par.    Instead  of  this,  gold  was  quoted 
as  the  fluctuating  article,  and  this  clearly  evinced  the  commer 
cial  opinion.     We  subjoin  a  table  of  the  prices  of  gold  relied 
upon   to   prove   the   depreciation ;    and  we   add,  in  two   other 
columns,   the  price  of  silver,   and  the   quantity  of  circulating 
bank-notes.     We  think  the  table,  thus  constructed,  proves  incon- 
testably  that  there  could  have  been  no  such  depreciation   of 
bank-notes  as  has  been  alleged.     All  the  circumstances  show 
that  there  was  an  extraordinary  demand  for  gold ;  it  would  have 
been  strange  if  there  had  not  been ;  and  this  table  proves  it,  for 
there  was  no  such  variation  in  the  price  of  silver.     The  highest 
authority  in  England  on  the  subject  of  prices,1  after  a  careful 
examination  of  all  the  facts,  decides  that  there  was  no  such  fluc 
tuation  or  rise  in  the  price  of  other  articles  of  commerce,  as  to 

1  Tooke's  History  of  Prices  and  of  the  State  of  the  Circulation  from  1793 
to  1837,  vol.  ii.,  p.  350. 


406 


PRICES  OF  GOLD  AND  SILVER. 


denote  any  depreciation  in  bank-notes.  This  examination  ex 
tended  to  over  forty  different  articles,  of  which  tables  are  given 
of  the  prices  from  1782  to  1838,  and  is,  probably,  as  thorough 
and  reliable  as  any  ever  constructed. 


DATE. 

Price  of  Standard 
Gold  in  bars,  per  oz. 

Price  of  Standard 
Silver  per  oz. 

CIRCULATION. 

£      s.       d. 

s.      d. 

£ 

1797 

3     17       6 

5       3J 

10,394,000 

1798 

3     17     10i 

5       1 

12,637,000 

1799 

3     17       9 

5       1 

13,174,000 

1800 

450 

5       1 

15,946,000 

1801 

440 

5       1 

15,384,000 

1802 

436 

5       8| 

16,141,000 

1803 

436 

5       74 

15,646,000 

1804 

400 

5       74 

17,110,000 

1805 

400 

5      94 

17,134,000 

1806 

400 

5       94 

19,378,000 

1807 

400 

5       94 

18,314,000 

1808 

400 

5       8 

17,649,000 

1809 

4     10       0 

5       8 

19,058,000 

1810 

4     10       0 

5       8 

22,906,000 

1811 

4     15       6 

6       2 

23,323,000 

1812 

4     15       0 

6       2 

23,217,000 

1813 

4     15       0 

6       2 

24,019,000 

1814 

4     19       6 

6       4 

26,584,000 

1815 

490 

5     114 

27,254,000 

1816 

406 

5       4 

26,885,000 

1817 

3     19       6 

5       1 

28,470,000 

1818 

3     19       6 

5       44 

26,986,000 

1819 

3     19       6 

5       44 

25,139,000 

1820 

3     17     104 

5       Of 

23,891,000 

1821 

3     17     104 

4  m 

22,039,000 

CHAPTER    XVI. 

THE    BANKS    OF    SCOTLAND. 

The  Sank  of  Scotland  promptly  chartered,  and  its  whole  plan  prescribed  in 
advance  —  John  Holland's  account  of  it  —  Contrast  with  the  origin  of  the 
Bank  of  England — The  founders  of  the  Scottish  Bank  merchants  who 
avoided  relations  with  the  Government  —  They  looked  to  it  as  a  means  of 
economizing  the  use  of  money  —  Bank-notes  —  Ti-ouUe  with  the  Royal 
Bank  —  Suspension  —  Modes  of  relief —  Little  loss  of  credit  —  Identified 
with  the  mass  of  the  people  by  receiving  small  deposits,  and  paying  interest 
for  them  —  Forty  banks,  and  340  branches  —  Harmony  of  action  — 
English  prejudices  and  Scotch  scorn  —  Cash  credits  in  account  a  principal 
feature  —  Mode  of  operation  —  Contrasts  with  the  English  system  —  The 
Scotch  system  equally  effective,  and  more  safe  —  Failures  of  banks  few, 
and  not  disastrous  —  Suspension  of  1797  in  England  has  no  effect  in 
Scotland  —  Report  in  the  House  of  Lords,  1826  —  Report  in  tlie  Com 
mons —  The  system  not  cordially  approved  in  England —  One  pound  notes 
—  Discussions  in  England  and  Scotland  —  Lessons  for  England  on  cur 
rency —  Sir  Walter  Scott  on  the  level  of  gold  —  Different  modes  of  regard 
ing  the  subjects  in  England  and  Scotland  —  Scotch  Banks  the  pride  of  the 
people  —  W.  Chambers'  distrust  of  the  system  — Explanations  in  reply. 

THE  first  public  bank  in  Scotland  was  established  by  act  of 
the  Scottish  Parliament,  in  1695,  previous  to  the  consolidation 
of  the  two  governments.  It  was  suggested  by  the  same  William 
Patterson  who  projected  the  Bank  of  England,  but  seems  to 
have  been  indebted  for  its  shape  and  constitution  to  John  Hol 
land,  who,  with  other  merchants  of  London,  were  participants, 
with  men  of  capital  in  Edinburgh,  in  this  enterprise.  Its  plan 
was  deliberately  drawn  up  in  advance,  and  its  privileges  and 
restraints  distinctly  marked.  The  Bank  of  England  crawled  into 
existence,  being  wormed  through  the  English  Parliament  under 
cover  of  an  act  in  reference  to  "  Duties  upon  the  Tonnage  of 
Ships,  and  upon  Beer,  Ale  and  other  liquors."  The  Scotch 

(407) 


408          BANKS    OF    ENGLAND    AND    SCOTLAND. 

Bank  had  a  free  birth,  and  found  favor  with  that  class  of  English 
merchants  who  disliked  the  Bank  of  England.  Holland  has 

o 

given  an  account  of  his  agency  in  bringing  forth  the  Bank  of 
Scotland,  in  a  pamphlet  bearing  this  ominous  title :  —  "  The 
Ruine  of  the  Bank  of  England  and  all  public  Credit  inevitable," 
(1715).  Holland  was  only  induced  to  engage  in  this  scheme,  by 
being  assured  that  he  could  have  an  "Act  of  Parliament  on  his 
own  conditions."  The  plan  drawn  up  by  him  has  proved  the 
foundation  of  one  of  the  most  successful  banking  systems  which 
has  yet  been  tried.  Prominent  among  its  provisions  is  the  pro 
hibition  to  lend  to  the  King.  The  Bank  of  England  originated 
in  a  loan  of  its  whole  capital  to  the  government,  and  began 
its  actual  business  by  lending  its  whole  credit  in  the  same 
way  —  a  measure  which  resulted  in  its  being  made  and  con 
tinued  a  great  financial  agent  of  every  administration,  from  that 
day  forward.  Mr.  Holland  did  not  appreciate  the  necessity 
of  such  an  agent,  nor  comprehend  the  propriety  of  its  being 
associated  with  a  bank,  or  with  the  business  of  banking.  The 
readiness  to  establish  a  bank  in  Scotland  is  seen  in  the  fact 
that,  whilst  in  England  the  shareholders  lent  the  government 
,£1,200,000  for  an  exclusive  monopoly  of  twelve  years,  the  Bank 
of  Scotland  was  allowed  a  monopoly  of  twenty-one  years,  with 
out  any  bonus  or  favor  to  the  government. 

The  Bank  of  England  was  moulded  by  those  circumstances 
in  which  it  had  its  origin,  and  which  accompanied  the  earlier 
years  of  its  history.  Its  whole  subsequent  history  has  a  double 
aspect  —  one,  its  connection  with  the  government  —  the  other, 
its  relations  with  commerce  and  individuals.  This  double  history 
proves,  whatever  may  be  alleged  to  the  contrary,  that  the  uniting 
these  two  kinds  of  business  in  one  great  banking  business  is  in 
consistent  neither  with  the  true  system  of  banking,  nor  with  the 
true  system  of  finance.  That  the  Bank  of  England  has,  in  many 
ways,  inflicted  its  full  share  of  evil  upon  the  people  of  England 
is  well  known,  and  at  times  these  mischiefs  may  have  been 
caused  by  the  connection  of  the  bank  with  the  government. 
But  whilst  such  evils  are  seen,  felt  and  remembered,  the 
advantages  of  the  connection  are  neither  observed  nor  under- 


BANK    OF    SCOTLAND.  409 

stood.1  The  founders  of  the  Bank  of  Scotland  were  chiefly  mer 
chants,  who  had  their  eyes  turned  exclusively  to  the  advantages 
of  banking  for  their  own  class.  They  were  of  that  class  which 
had  so  strongly  advocated  institutions  of  credit  in  England,  pre 
vious  to  the  establishment  of  the  Bank  of  England.  They  were 
men  who  knew  well  the  functions  and  practice  of  the  Banks  of 
Venice,  Genoa  and  Amsterdam,  and  the  modes  of  payment  at 
the  Fairs  on  the  continent.  They  believed  in  the  efficacy,  safety 
and  propriety  of  circulating  credit,  although  their  ideas  of  the 
mode  of  carrying  it  out  may  have  been  far  from  definite  or  har 
monious.  They  fully  understood  that,  to  a  certain  extent,  to  be 
determined  in  the  progress  of  business,  a  system  of  credit  could 
be  made  to  supply  absolutely  the  place  of  money.  They  wished 
to  avail  themselves  of  that  economical  device  as  far  as  it  was 
applicable.  The  object  was  not  to  supplant  or  find  a  substitute 
for  the  precious  metals,  but  simply  to  effect  the  ends  of  trade,  to 
every  possible  extent,  without  them,  knowing  they  must  intervene 
and  be  employed  whenever  the  exigencies  of  payment  required. 

The  Bank  of  Scotland  issued  bank-notes  of  several  denomina 
tions,  from  the  beginning  of  its  business,  from  .£100  down  to  <£!, 
and  even  less ;  but  as  we  have  already  dwelt  largely  on  the 
functions  of  that  form  of  currency,  and  shall  have  occasion  to  do 
so  again,  in  treating  of  the  banks  of  the  United  States,  we  shall 
make  them  the  occasion  of  only  incidental  remark,  in  speaking 
of  the  banks  of  Scotland.  In  one  aspect  of  their  use  in  Scot 
land,  the  general  observations  we  have  made  respecting  them 
apply ;  in  another,  their  use  is  modified  by  that  peculiar  feature 
of  the  banks  of  Scotland  which  distinguishes  them  from  all 
others.  An  exhibition  of  that  feature  will  show  how  bank-notes 
operate  or  circulate,  in  reference  to  it. 

The  Bank  of  Scotland,  with  all  the  care  and  skill  of  its  early 
management,  did  not  escape  a  signal  reverse.  Having  a  mo 
nopoly  of  twenty-one  years  when  established,  its  directors  under 
took  to  extend  that  monopoly  beyond  the  time,  by  extinguishing 

1  We  shall  specially  advert  to  this  subject  in  a  Chapter  on  Public  Pay 
ments. 


410  SMALL    DEPOSITS. 

the  Royal  Bank  of  Scotland  —  a  rival  which  threatened  to  be 
of  sufficient  importance  to  divide  the  business  of  the  country 
with  them.  This  narrow  policy  was  met  by  a  measure,  on  the 
part  of  the  Royal  Bank,  which  forced  the  Bank  of  Scotland  to 
suspend  payments  in  1727. ]  Although  this  was  a  serious  affair 
for  that  bank,  it  was  surmounted  without  any  great  diminution  of 
its  credit  or  business.  The  measure  of  relief  from  which  it  de 
rived  most  benefit  shows  the  confidence  of  the  public.  It  issued 
notes  payable  at  six  months  after  date,  bearing  five  per  cent, 
interest,  and  with  these  redeemed  a  portion  of  its  circulation  of 
<£5  notes  and  upwards.  This  succeeded  so  well,  that  it  was  ap 
plied,  a  few  years  afterwards,  to  the  notes  of  XI  and  below  that 
amount ;  and  subsequently,  upon  emergency,  it  was  for  a  time 
resorted  to  by  all  the  banks  of  Scotland,  until  it  generated 
abuses,  which  being  the  subject  of  much  complaint,  the  system 
was  abandoned. 

Whilst  the  Bank  of  England,  from  its  first  conception,  was 
identified  with  the  government,  the  Bank  of  Scotland,  and  those 
which  succeeded  it,  identified  themselves  with  the  whole  body 
of  the  people,  from  the  laborer  who  could  save  five  pounds  to 
the  richest  merchants  and  manufacturers.  They  became  at  once, 
and  have  continued  to  be,  the  savings  banks  of  the  poor  but  in 
dustrious  classes.  The  banks  paid  one  per  cent,  below  the  cur 
rent  rate  of  interest  for  these  deposits,  and  returned  them  on 
demand,  or  according  to  stipulation.  These  savings  of  the  poor 
help  largely  to  make  up  the  vast  sum  of  deposits  which  charac 
terizes  the  banks  of  Scotland.  One  important  result  of  this  has 
been  to  give  the  benefits  of  these  savings  to  the  general  cus- 

1  The  Royal  Bank  had  obtained  the  use  of  £20,000  of  public  money, 
which  was  to  be  distributed  in  Scotland.  The  first  use  which  was  made 
of  it  was  to  arrest  the  jealous  career  of  the  Bank  of  Scotland.  From  that 
time  to  this,  the  Scotch  banks  have  been  noted  for  harmonious  co-operation. 
It  is  asserted  by  some  writers  of  good  authority,  that  this  proceeding  of  the 
bank  was  wholly  unprovoked,  and  that  it  used  the  public  money  which 
good-fortune  threw  in  its  way,  to  humble  and  injure  an  institution  which 
had  such  an  advantage  of  them  in  credit,  and  in  an  established  business, 
that  it  was  thought  expedient  to  bring  some  discredit  upon  it,  as  the  best 
means  of  gaining  business. 


BENEFITS    TO     THE    POOR.  411 

tomers  of  the  banks,  instead  of  their  being  invested  in  the  public 
debt,  or  lent  upon  mortgage,  as  in  England.  No  doubt  this  has 
contributed  greatly  to  that  progress  in  wealth  and  productive 
industry  which  has  so  much  distinguished  Scotland  for  more 
than  a  century.  It  had  another  good  effect,  in  begetting  that 
care,  caution  and  prudent  management  for  which  the  banks  of 
Scotland  have  so  well-founded  a  reputation.  This  acceptance 
of  small  deposits,  and  paying  interest  for  them,  had  also  the 
eifect  of  giving  the  poor  a  deep  concern  in  the  same  banks  in 
which  were  the  deposits  of  the  rich,  who  were  owners  also  of 
the  stock.  The  interests  of  both  classes  were  thus  bound  up  in 
the  same  banks,  subject  to  the  same  management  and  the  same 
vicissitudes.  The  prosperity  of  the  banks  was  the  security  of 
the  poor  depositor,  and  a  guarantee  of  both  his  interest  and  his 
principal.  A  large  circulation  was  regarded  by  the  poor  as  not 
only  beneficial,  by  making  currency  abundant,  but  as  evidence 
of  the  success  of  the  banks.  That  jealousy  of  banks  so  visible 
both  in  England  and  in  the  United  States,  does  not  exist  in 
Scotland ;  and  yet  the  proportion  of  banks  in  Scotland  to  the 
population  is  far  less  than  in  England  and  the  United  States : 
far  less,  if  we  regard  the  principal  banks ;  but  these  have  been 
so  favored  in  Scotland,  that  40  banks  have  been  permitted 
to  establish  340  branches  :  so  that  Scotland  has  380  bank  offices 
for  a  population  of  less  than  3,000,000  ;  these  380  banks, 
emanating  from  only  about  40  heads,  are  not,  however,  like 
380  rival  establishments  struggling  for  superiority,  and  aiming 
to  supplant  each  other  in  business,  if  not  to  crush  each  other  as 
competitors.  There  is  a  harmony  and  unity  of  object  among 
the  heads,  which  is  diffused  among  all  the  branches,  which  is 
seen  in  the  regularity  and  steadiness  of  their  operations,  and 
which  is  felt  throughout  the  whole  community.  No  country 
enjoys  a  paper  currency  so  free  from  fluctuations  in  quantity,  as 
that  of  Scotland :  yet  so  little  are  the  advantages  of  the  Scotch 
system  known  and  appreciated  elsewhere,  that  there  has  been 
a  constant  itch  in  England  to  reform  the  banks  of  Scotland,  and 
bring  them  nearer  to  English  ideas  of  currency.  The  Scotch 
system  is  so  contrary  to  the  notions  prevailing  in  England  upon 


412  CASH    CREDITS. 

the  subject  of  money  and  currency,  that  some  of  the  statesmen 
and  currency-mongers  there  endure,  with  bad  grace,  the  stand 
ing  refutation  which  the  Scotch  banks  furnish  of  their  opinions. 
They  regard  their  success  as  exceptional  and  accidental ;  and, 
but  for  personal  as  well  as  currency  prejudices,  they  would  pre 
fer  giving  the  credit  to  the  good  management  of  the  banks, 
rather  than  permit  any  portion  of  it  to  stand  for  the  benefit  of 
the  system.  The  English  people  do  not  understand  the  Scotch 
system,  but  the  Scotch  people  do  understand  the  English  sys 
tem  ;  and  having  seen  the  terrible  inflictions  it  has  visited  upon 
England,  and  from  which  they  are  nearly  exempt,  they  return 
the  officious  kindness  which  would  disturb  their  system,  operating 
to  their  entire  satisfaction,  and  assimilate  it.  to  the  English  sys 
tem,  which  is  fraught  with  dangers,  and  is  not  even  popular  at 
home,  with  mockery  and  scorn.1  The  struggles  on  this  subject, 
in  Parliament  and  out  of  it,  have  been  many ;  but  in  all,  the 
Scots  have  come  off  victorious,  having,  in  not  a  few  instances, 
extorted  the  admiration  of  those  who,  perhaps  for  the  first  time, 
were  fully  made  to  understand  the  effectiveness  and  safety  of 
Scotch  banking. 

The  chief  distinction,  however,  of  the  Scottish  system  of  bank 
ing  is  found  in  the  cash  credits  granted  by  the  bank,  and  which 
we  designate  cash  credits  in  account.  These  are  peculiar  to 
Scotland  ;  and  although  they  do  not  constitute  the  chief  business 
of  the  bank,  they  no  doubt  exercise  a  controlling  influence,  and 
give  a  special  character  to  the  whole  practice  of  the  Scotch 
banks.  It  is  estimated  that  there  are  twenty  thousand  of  these 
accounts,  covering  a  sum  of  five  millions  sterling.  As  the  actual 
deposits  in  the  Scotch  banks  amount  to  thirty  millions  sterling, 
the  cash  credits  bear  nominally  but  a  small  proportion  to  this 
item  of  deposits.  The  importance  of  the  cash  credits  is  to  be 

1  Sir  Walter  Scott  compares  this  persistent  effort  to  reform  the  Scotch 
banks  to  that  of  an  eccentric  but  hospitable  Scotch  laird,  who  forced  the 
guests  who  remained  with  him  over-night,  to  take  one  of  Anderson's  pills 
before  retiring  —  a  practice  which  he  had  long  followed,  and  which  he  was 
determined  every  one  else  should  follow,  who  came  within  reach  of  his  kind 
ness.  "  Only  one  leetle  Anderson."  —  Malaclii  Malagrowtker,  Letter  L,  p.  29. 


FORM    OF    BOND.  413 

considered  with  reference  to  their  functions  and  activity,  rather 
than  their  amount.  A  cash  credit  is  an  account  opened  by  a 
bank  with  a  customer  for  an  amount  from  £100  to  £1000,  which 
is  placed  not  to  his  credit,  but  at  his  disposal.  The  applicant 
for  this  accommodation,  which  is  only  granted  by  the  directors 
of  the  principal  bank,  is  strictly  examined  as  to  his  business, 
means  and  prospects,  and  the  credit  is  accorded  upon  his 
giving  two  or  three  sureties  in  a  bond  for  the  amount  of  the 
credit.  This  bond  is  so  drawn,  as  to  cover  any  liability  to  the 
bank  for  the  amount,  wrhether  drawn  upon  the  credit  as  drawer 
or  endorser  of  bills.1  No  limit  is  placed  to  the  use  of  the  credit, 

1  The  form  of  keeping  a  cash  credit  account  may  be  seen  at  page  76  of 
the  Report  from  the  Lords'  Committee,  on  the  circulation  of  notes  under 
£5,  in  Scotland  and  Ireland,  printed  in  April,  1827.  The  form  of  the  bond 
is  as  follows  :  — 

"We,  A.  B.  C.  D.  and  E.  F.,  considering  that  the  bank  has  agreed  to 
allow  us  a  standing  credit  to  the  extent  of  one  thousand  pounds  sterling 
upon  a  cash  credit  account,  to  be  kept  in  the  name  of  one  of  us,  the  said 
A.  B.,  in  the  books  of  the  said  bank,  and  to  be  operated  upon  by  him,  and 
may  also  discount  or  purchase  bills,  whereon  the  name  of  the  said  A.  B., 
or  the  firm  of  any  company  of  which  he  is  a  partner,  may  stand  as  a  drawer, 
acceptor  or  endorser,  and  that  upon  condition  of  our  granting  these  pre 
sents  :  Therefore  we,  the  said  A.  B.  C.  D.  and  E.  F.,  hereby  bind  and  oblige 
ourselves,  as  full  debtors  and  co-obligants,  and  our  respective  heirs,  execu 
tors,  and  successors  whomsoever,  all  conjunctly  and  severally,  to  content 
and  pay  to  the  said  bank  the  foresaid  sum  of  one  thousand  pounds  sterling, 
or  such  part  or  parts  thereof  as  the  said  A.  B.,  or  any  person  or  persons 
having  his  letter  or  other  written  authority,  shall  value  for  or  draw  out  by 
orders  or  drafts  on  the  said  bank,  or  its  manager,  cashier,  or  any  of  its  offi 
cers  at  Edinburgh,  or  any  of  its  agents,  cashiers,  or  other  officers  elsewhere, 
in  virtue  of  the  foresaid  credit:  and  also  such  sum  or  sums  of  money  as  the 
said  A.  B.  shall  stand  engaged  for  or  be  indebted,  resting  or  owing  to  the 
said  bank  on  account  of  any  bills  discounted  or  held  by  it,  whereon  his 
name  as  an  individual,  or  the  firm  of  any  company  of  which  he  is  a  partner, 
shall  stand  as  drawer,  acceptor,  or  endorser,  or  any  sum  or  sums  for  which 
he  or  they  shall  stand  engaged  or  indebted  to  the  said  bank  by  acceptances, 
endorsations,  letters  of  credit,  guarantees,  or  in  any  other  manner  of  way 
whatsoever,  and  all  or  any  of  which  obligations  as  aforesaid  the  said  bank 
shall  be  entitled  to  place  to  the  debit  of  the  said  account  and  of  the  obli- 
gants  hereto,  at  any  time  before  this  bond  is  discharged  and  delivered  up, 
and  that  without  intimation  to  any  of  the  said  parties,  but  not  exceeding  in 


414        CASH    CREDITS    TERMINABLE    AT    WILL. 

it  is  terminable,  at  the  pleasure  of  either  party,  by  payment 
and  discontinuance  on  the  part  of  the  customer,  or  by  withdrawal 
of  the  accommodation  on  the  part  of  the  bank.  But  it  is  rare 

all  the  said  principal  sum  of  one  thousand  pounds  sterling,  and  interest  duo 
thereon ;  and  that  at  any  time  when  the  same  shall  be  demanded  after 
three  months  from  the  date  hereof,  together  with  the  legal  interest  thereof, 
from  the  time  or  times  of  the  respective  advances  until  the  same  be  repaid, 
with  a  fifth  part  more  of  the  said  principal  sum  due  of  penalty  in  case  of 
failure.  And  it  is  hereby  specially  conditioned  and  agreed  to,  that  a  stated 
account,  made  out  from  the  books  of  the  said  bank,  and  signed  by  one  of 
its  accountants,  shall  be  sufficient  to  constitute  a  charge  or  balance  against 
us  and  each  of  us,  whereof  no  suspension  shall  pass  at  the  instance  of  any 
of  us,  except  on  consignation  only  of  the  sum  due  thereon.  And  it  is 
hereby  declared  that  there  is  nothing  hereby  meant  to  supersede  or  vacato 
the  security  which  the  said  bank  already  holds,  or  may  hold,  over  any 
shares  of  stock  of  the  said  bank  and  profits  thereon,  belonging  or  that  may 
belong  to  any  of  us  for  any  advances  under  this  bond  or  otherwise,  it  being 
always  in  the  power  of  the  said  bank  to  appropriate  or  allow  of  the  disposal 
in  any  way  whatever  of  all  or  any  of  the  shares  of  said  stock  ;  and  the  said 
parties  to  this  bond  hereby  declare  that  they  have  no  lien  over  the  said 
shares,  or  any  right  to  insist  upon  the  application  of  the  same  to  payment 
of  any  debts  to  be  hereby  contracted.  And  further,  the  said  parties  agree 
that  the  obligation  hereby  come  under  shall  remain  in  full  force  in  the  same 
manner  and  to  the  same  extent  as  if  such  shares  of  stock  had  never  belonged 
to  any  of  the  parties  hereto,  and  it  being  hereby  agreed  that  the  said  bank 
may  allow  credit  on  the  said  shares,  or  the  same  to  be  sold,  and  the  price 
to  be  paid  to  the  seller,  or  may  apply  the  same  to  any  other  purpose  accord 
ing  as  it  shall  deem  expedient,  being  bound  in  the  latter  case  to  account 
only  to  the  person  or  persons  to  whom  the  shares  belonged. 

"And  further  declaring,  as  the  said  cash  credit  account  is  to  be  in  the 
name  of  the  said  A.  B.,  and  he  is  to  conduct  the  transactions  thereon,  it  is 
hereby  especially  provided  and  agreed  to,  that  all  communications  on  the 
part  of  the  bank,  regarding  either  the  management  by  him  of  the  accounts 
or  repayment  of  the  balance  or  balances  which  may  become  due  thereon, 
shall  or  may  be  made  to  us,  the  other  parties,  through  the  said  A.  B.,  with 
whom  the  said  bank  shall  be  at  liberty  to  make  any  arrangements,  by 
affording  further  opportunities  for  better  management  of  the  accounts 
according  to  the  rules  of  the  said  bank,  if  deviated  from,  or  in  any  other 
way  required,  or  by  giving  time  for  repayment  of  the  balance  or  balances 
thereof,  without  any  direct  application  to  or  concurrence  by  us  the  said  C. 
D.  and  E.  F.  on  the  subject,  until  the  said  bank  shall  consider  this  neces 
sary  for  a  final  settlement  And  it  shall  also  have  the  power,  without  con 
sultation  with  or  consent  by  us,  to  compromise  with  or  give  time  to  any  of 


THE    LENDING    OF    CREDIT.  415 

that  a  termination  takes  place,  except  in  the  case  of  persons 
retiring  from  business ;  for  the  advantage  is  so  great  to  each  of 
the  parties,  that  both  strive  to  make  it  mutually  beneficial,  and  to 
prolong  it  during  a  whole  business  life.  A  cash  credit  is  a  per 
petual  resource  to  the  holder  for  any  sum  within  the  amount. 
He  draws  upon  it  at  any  moment,  as  upon  a  deposit,  for  the  sum 
required,  and  pays  interest  upon  the  sums  thus  drawn,  and 
returns  at  his  convenience  any  sum  in  his  hands,  upon  which  he 
receives  one  per  cent,  interest  less  than  the  rate  on  sums  drawn 
out.  It  is  the  advantage  of  the  holder  of  the  credit  to  deposit 
his  money  as  quickly  as  possible,  as  a  regular  interest  account 
is  kept  with  him :  he  is  charged  with  interest,  say  at  five  per 
cent,  upon  all  he  has  taken,  and  credited  with  interest  at  four 
per  cent,  for  all  he  has  deposited.  At  convenient  times,  gene 
rally  twice  a  year,  the  account  is  made  up  and  balanced,  and  a 
new  account  is  opened.  A  credit  account  in  Scotland  is,  there 
fore,  literally  a  loan  of  credit  on  the  part  of  the  bank,  which 
credit  is  to  be  paid  for  in  proportion  as  it  is  used.  When  a  bill 
of  exchange  is  discounted  by  a  bank  in  England,  the  proceeds 
are  placed  to  the  credit  of  the  person  obtaining  the  discount  as 
so  much  money,  to  be  drawn  for  at  pleasure ;  and  this  is  sup 
posed  to  be  discounting  business-paper.  The  cash  credit  of  a 

the  parties  on  the  bills  discounted  or  held  by  it  as  aforesaid,  we,  the  said 
C.  D.  and  E.  F.  having  always  full  opportunity  afforded  us  by  t^e  said 
bank,  whenever  we,  or  either  of  us,  wish  and  apply  for  the  same,  to  see  any 
of  the  transactions  and  state  of  the  said  cash  credit  account,  and  other 
transactions  of  the  said  A.  B.  in  which  we  may  be  interested  by  the  obliga 
tions  of  this  bond ;  and  the  said  bank  shall  only  be  bound  to  attend  to  any 
instructions  we  may  give  on  the  subject  in  writing,  and  acknowledged  in 
writing  to  have  been  received.  It  being  hereby  expressly  declared  that  all 
the  parties  to  this  bond  are  pari  passu  co-obligants  to  the  said  bank ;  and 
that  all  and  each  of  us  are  equally  bound  to  it,  and  shall  not  be  entitled  to 
plead  that  any  of  us  are  the  cautioners  for  the  other;  and  we,  the  said  A. 
B.  and  E.  F.  consent  to  the  registration  hereof,  and  of  the  foresaid  stated 
accounts,  in  the  books  of  council  and  session,  that  letters  of  horning  on  six 
days'  charge,  and  all  execution  necessary,  may  pass  on  a  decree  to  be  in- 
terponed  then  and  thereto,  in  form  as  officers,  and  for  that  purpose  we  con 
stitute,  &c.  In  witness  whereof  these  presents,  written  upon  this  sheet  of 
stamped  paper,  by  our  procurators,  &c." 


416  ENGLISH    AND    SCOTCH 

Scotch  bank  has  no  reference  to  special  transactions  of  business, 
but  is  an  open  credit,  to  be  employed  as  occasion  demands.  In 
England,  the  bank  which  deals  in  promissory  notes  and  bills  of 
exchange,  is  dealing  in  paper  which  represents  business  transac 
tions  which  are  past ;  in  Scotland,  the  bank  opens  credits  for  its 
customers,  with  reference  to  business  which  is  to  come.  In  Scot 
land,  the  banks  give  their  customers  a  credit  which  helps  their 
standing,  and  upon  which  they  can  draw  for  the  purpose  of  pay 
ment,  whenever  there  is  need.  The  theory  of  the  English  banks 
is,  that  the  currency  must  follow,  and  be  controlled  in  quantity, 
by  the  business  transactions  which  go  before.  The  theory  of  the 
Scotch  banks  is,  that  these  business  transactions  being  all  man 
aged  by  men  of  business,  who  decide  according  to  the  exigencies 
of  industry  and  trade  what  will  promote  their  private  interest, 
and  meet  the  wants  of  the  people,  it  must  prove  an  important 
aid  to  men  thus  engaged  to  supply  them,  in  advance  of  the 
progress  of  their  business,  with  a  credit  upon  which  they  can 
draw  at  pleasure.  The  English  doctrine  is,  that  men  must  do 
all  their  business,  in  the  first  instance,  upon  their  own  credit ; 
and  the  banks  may  then  deal  in  the  evidences  or  securities  to 
which  the  business  has  given  origin :  the  Scottish  notion  is,  that 
aid  should  be  extended  to  men  of  trade  and  industry  in  advance 
of  their  transactions,  and  as  an  element  in  their  plans  of  busi- 
ness.^  In  England,  they  think  this  will  lead  to  over-trading,  by 
the  stimulus  it  aifords  to  so  large  a  class  of  dealers :  in  Scot 
land,  long  experience  has  taught  them  that  this  English  appre 
hension  is  wholly  groundless.  They  know  that  the  dealers  who 
enjoy  these  cash  credits  are  so  immediately  brought  under  the 
supervision  of  the  banks,  and  their  own  sureties,  that  they  are, 
perhaps,  the  most  prudent  and  safe  men  of  business  in  the 
world.1 

The  system  of  banking  in  Scotland  has,  by  a  long  and  steady 

1  A  witness  before  Parliament,  in  1826,  said :  —  "  I  literally  have  hardly 
ever  heard  of  a  bad  debt  by  cash  accounts.  The  Bank  of  Scotland,  I  am 
euro,  lost  hardly  anything  in  an  amount  of  receipts  and  payments  of  hun 
dreds  of  millions.  They  may  have  lost  a  few  hundred  pounds  in  a  cen 
tury." 


SYSTEMS    CONTRASTED.  417 

experience,  vindicated  itself  against  objections  raised  upon  English 
theories ;  and  its  superiority  in  operation  over  the  practice  of 
English  banking  is  so  manifest,  as  to  extort  commendations  of 
the  strongest  kind  from  Parliamentary  Committees.  When  the 
necessity  of  reform  in  English  banking  was  admitted,  and  mea 
sures  of  reform  were  adopted,  it  was  determined  that  no  change 
was  needful  in  Scotland.1 

We  have  shown,  in  the  chapters  on  bank-notes  and  on  depo 
sits,  that  the  fund  by  means  of  which  nearly  all  the  payments 
of  commerce  were  effected,  was  derived  from  the  proceeds  of 
bills  of  exchange  and  promissory  notes  discounted  by  the  banks. 
These  proceeds  take  the  shape  of  bank-notes  or  deposits,  but 
chiefly  the  latter,  and  in  that  form  become  more  available  in 
payment  than  any  other  currency.  We  have  shown  how  this 
took  place :  that  the  banks  purchased  the  paper  discounted  by 
the  issue  of  these  credits,  and  that  they  could,  therefore,  receive 
the  credits  in  payment  of  the  securities  :  that  these  credits  could 
circulate  for  the  average  time  of  the  paper  discounted,  before 
they  would  be  absorbed  by  the  banks  in  payment  of  the  paper 
as  it  matured :  that,  by  means  of  this  circulation,  an  immense 
amount  of  payments  was  effected,  both  in  and  out  of  the  banks  : 
that  the  demand  for  this  currency,  for  payment  of  debts  to  the 
bank,  gave  it  full  employment,  and  fully  maintained  its  nominal 
value :  that  this  system  of  discounts  and  currency  enabled  men 
of  business  to  employ  the  paper  they  take  in  paying  the  paper 
they  give :  and  that,  as  the  debts  of  trade  are  in  a  large  degree 
mutual,  this  system  is,  to  that  extent,  a  plan  of  adjustment  by 
which  mutual  debts  are  set-off,  without  being  brought  face  to 
face  in  one  account. 

By  this  system,  the  basis  of  the  bank-notes  and  deposits  is 
the  merchandise  purchased  with  the  discounted  paper,  and  the 
punctuality  and  ability  of  the  debtors  ;  the  banks  having,  at  all 
times,  a  greater  demand  on  the  public  than  the  public  has  on 
the  banks,  with  this  difference,  however,  that  the  claim  of  the 

1  Extracts  from  Parliamentary  Reports  of  1826  will  be  given,  in  this 
chapter,  to  prove  this. 

27 


418          THE    SAFE    POSITION    OF    THE    BANKS. 

public  on  the  banks  is  payable  on  demand,  whilst  the  claim  of 
the  banks  on  the  public  is  on  paper,  averaging  a  period  of  two  or 
three  months,  which  gives  the  public,  in  periods  of  financial  diffi 
culty,  a  crushing  advantage  over  the  banks.  This  advantage, 
however,  is  one  which  causes,  in  such  times,  a  destructive  reac 
tion  on  the  public.  Banks  and  their  customers  are  alike  crushed 
by  this  system,  in  seasons  of  alarm  or  commercial  revulsion. 

The  Scottish  system  of  banking,  so  far  as  it  rests  upon  cash 
credits,  has  some  very  different  aspects  from  the  system  referred 
to  above.  If  the  banks  of  Scotland  have  granted  five  millions 
sterling  in  these  credits,  they  are  liable  to  be  drawn  upon  for 
that  amount,  at  the  pleasure  of  the  persons  holding  the  credits ; 
but  to  be  drawn  upon  only  for  their  bank-notes,  for  that  is  the 
agreement.  If  the  holders  were  to  demand  gold,  it  could  be 
refused,  and  the  accounts  could  be  closed.  The  banks,  in  fact, 
pay  their  notes  only  to  those  who  draw  upon  these  credits.  If 
the  notes  were  drawn,  and  the  gold  demanded  for  them,  the 
banks  could  not  refuse ;  but  they  can,  at  pleasure,  close  the 
credit  accounts,  and  demand  immediate  payment  of  all  that  has 
been  dra^Yn  out  upon  them.  The  banks  of  Scotland  have,  then, 
an  actual  practical  demand  upon  the  public  for  an  amount  as 
large  as  the  public  have  on  them,  with  the  advantage  to  the 
banks,  that  their  claim  is  all  in  their  own  hands,  and  can  bo 
made  in  a  few  hours,  whilst  the  demand  of  the  public  on  the 
banks  is  scattered  over  a  wide  surface,  and  cannot  be  concen 
trated  upon  them  for  many  days.  The  holder  of  a  cash  credit 
in  Scotland  is  at  all  times  at  the  mercy  of  the  bank,  which  can 
afford  to  be  liberal,  because  it  is  never  in  danger. 

To  a  considerable  extent,  banking  in  Scotland  is  conducted 
as  elsewhere,  and  it  is  susceptible  of  employing,  and  does  em 
ploy,  every  good  device  of  English  or  American  banking.  In 
Scotland,  the  fund  employed  in  payment  of  debts  is  not  derived, 
chiefly  as  in  England  and  the  United  States,  from  the  proceeds 
of  discounted  paper,  but,  in  a  large  measure,  from  the  open  cash 
credits.  This  fund  is  not  based  upon  actual  business  transac 
tions,  or  upon  commodities  which  have  actually  changed  hands 
in  the  channels  of  trade.  It  is  a  facility  of  payment  granted  in 


BENEFITS    OF    CASH    CREDITS.  419 

advance  by  the  banks.  The  holders  of  these  credits,  in  the  pro 
gress  of  their  business,  have  the  choice  of  paying  for  what  they 
purchase  in  bank-notes  drawn  out  upon  their  credits,  or  of  taking 
the  longest  credit  they  can  obtain,  and  then  paying  in  notes 
drawn  from  the  banks  upon  their  credits.  Individual  credits  are 
as  common  in  Scotland,  and  perhaps  more  so,  than  elsewhere. 
It  is  usual  there  to  take  acceptances  for  small  amounts  sold  on 
credit,  and  to  collect  them  through  the  banks.  The  facility  of 
payment  furnished  by  the  cash  credits  makes  renewals  of  credit 
less  common,  and  greatly  aids  punctuality,  especially  in  the 
lower  branches  of  trade.  They  are  a  resource,  and  a  means  of 
payment,  ever  ready  at  the  command  of  the  holder.  The  notes 
issued  upon  them  perform  the  same  functions  of  payment  in  cir 
culation  which  the  notes  of  other  banks  do.  If,  in  England,  the 
customer  of  a  bank  is  denied  a  discount,  the  proceeds  of  which 
would  have  been  employed  in  paying  a  debt,  and  that  debt 
remains  unpaid,  a  circulation  of  notes  is  arrested  or  pre 
vented,  with  very  disastrous  results  for  many  individuals. 
One  hundred  pounds  thus  put  in  circulation  in  bank-notes  or 
deposits  may,  in  a  few  days,  pay  ,£1000 ;  but,  stopped  at  the 
beginning,  it  may  cause  to  the  persons  interested  in  that  circu 
lation  a  loss  of  perhaps  several  hundred  pounds.  The  bank 
in  England  acts,  in  refusing  a  discount,  with  especial  reference  to 
its  own  position  and  interests,  and  perhaps  with  necessary  pru 
dence.  The  banks  of  Scotland,  anticipating  the  friction  of  this 
separate  movement  of  business  in  the  banks,  and  business  out 
of  the  banks,  have,  as  a  preventive,  advanced  credits  to  their 
customers  for  a  large  sum,  upon  which  they  can  rely,  and  for 
the  use  of  which  they  have  to  make  no  special  application  to  the 
banks.  Thus  a  large  fund,  applicable  for  payments,  and  subject 
to  be  drawn  as  a  deposit  or  paid  out  in  bank-notes,  is  placed  by 
the  Scottish  banks  at  the  discretion  of  their  customers,  and 
through  them  at  the  service  of  the  public,  for  which  no  applica 
tion  is  required,  and  about  the  use  of  which  there  is  no  uncer 
tainty.  That  these  credits,  thus  employed,  prevent  a  vast 
amount  of  currency  friction,  is  demonstrated  by  the  undeniable 
success  of  Scotch  banking,  and  the  great  progress  of  that  country 


420  BASIS    OF    CASH    CREDITS. 

iit  wealth.  We  have  already  adverted  to  the  safety  of  the  debts 
arising  upon  this  practice  of  the  banks  :  this  safety  does  not  rest 
wholly  upon  the  special  securities  taken  when  the  credits  are 
granted. 

If  the  banks  of  Scotland  have  granted  five  millions  sterling 
of  credits,  from  two  to  three  millions  would,  according  to  the 
average  of  their  use,  be  drawn  from  the  banks  all  the  time :  that 
is,  the  average  amount  out  of  the  banks  would  be  about  that 
proportion.  For  each  sum  drawn  by  any  holder  of  a  credit,  we 
may  assume  that  he  either  paid  a  debt  incurred  for  property 
previously  purchased,  or  made  a  purchase  of  commodities  just 
received.  Thus,  the  two  or  three  millions  sterling  at  any  time 
actually  drawn  upon  the  amount  of  credits,  have  been  just  as 
much  employed  in  actual  business  as  if  they  were  the  proceeds 
of  promissory  notes  or  bills  of  exchange  ;  commodities  have  been 
purchased  or  paid  for  by  the  amount  thus  drawn.  The  commo 
dities  thus  obtained  are  the  means  which  the  holders  of  the 
credits  rely  upon  to  secure  the  amount  of  currency  needful  to 
make  good  their  payments ;  for,  though  they  are  not  bound  to 
any  day  for  restoring  the  amounts  drawn  upon  their  credits,  they 
are  required  to  keep  the  account  active,  as  the  evidence  of  a  pro 
gressive  and  safe  business.  They  enjoy  this  great  advantage,  that 
if  they  sell  a  commodity  within  a  few  days  after  the  purchase  and 
receive  the  cash,  they  can  return  the  amount  to  the  bank  at 
once,  and  save  all  but  one  per  cent,  of  the  interest  incurred.  By 
the  English  mode  there  is  a  much  greater  expenditure  of  interest ; 
for  a  note  once  discounted,  the  interest  for  the  whole  time  of  the 
paper  is  deducted,  and  is  not  to  be  recovered.  For  the  amount 
upon  the  cash  credits,  the  debtors  are  not  under  the  strong 
necessity  of  paying  at  any  particular  day ;  but  they  are  placed 
under  incentives  of  interest  and  prudence,  which,  if  they  do  not 
enforce  payment  upon  a  day  fixed,  are  sufficient  to  secure  prompt 
attention :  the  credit  account  must  be  active,  and  interest  must 
be  saved.  These  motives  are  found  so  powerful,  that  the  credits 
are  not  abused  by  being  converted  into  standing  loans ;  the 
banks  of  Scotland  are  not  forced  to  abolish  cash  credits,  because 
both  the  day  of  drawing  and  the  day  of  payment  are  at  the  dis- 


DEMAND    FOR    BANK-NOTES.  421 

cretion  of  their  customers.  They  are  fully  secured  from  the 
abuse  of  this  discretion  by  their  power  to  close  the  account,  and 
demand  payment  of  the  amounts  drawn,  at  their  pleasure. 

The  Scottish  Banks  have  ultimate  security  for  their'  cash 
credits,  in  the  bonds  they  take  for  that  purpose  with  substantial 
names ;  but  the  real  basis  for  the  issues  of  notes  made  upon 
these  credits,  in  the  commercial  or  banking  aspects  of  the  sub 
ject,  is  the  merchandise  or  commodities  which  the  notes  thus 
drawn  have  paid  for  or  purchased :  with  these,  the  debtors  can 
obtain  currency  to  replace  the  amounts  drawn.  The  two  or 
three  millions  of  notes  thus  drawn  upon  the  credits,  and  for 
which  the  banks  are  liable  to  the  public,  have  been  exchanged 
for  commodities,  or  something  for  which  there  is  a  demand,  and 
these  commodities  in  the  hands  of  the  debtors  form  a  real  and 
active  means  of  repaying  the  banks.  They  form  the  true  bank 
ing  basis ;  for  the  bond  with  its  sureties  is  but  a  precaution 
against  dishonesty  and  abuse,  which  is  but  rarely  resorted  to  for 
payment.  If  it  were  not  rare  that  the  sureties  in  these  cash 
credit  bonds  were  called  upon  for  payment,  the  system  would 
soon  be  discontinued.  It  is  this  real  basis  of  commodities  in 
trade,  and  movements  in  industry,  which  sustains  the  cash 
credits  in  their  benefits  both  to  the  banks  and  their  customers — 
which  redeems  the  notes  of  the  one,  and  pays  the  debts  of  the 
others. 

The  demand  for  bank-notes  in  Scotland,  notwithstanding  the 
discretion  allowed  in  returning  amounts  drawn  upon  the  credits, 
is  still  great  enough,  for  reasons  already  stated,  to  maintain  their 
value  :  this  is  proved  by  their  usurping  the  entire  circulation  in 
Scotland.1  The  people  seem  to  desire  nothing  better  than  the 
one-pound  notes  of  their  own  banks ;  and  all  the  attempts,  on 
the  part  of  Parliament,  to  reform  their  currency,  and  introduce 


1  A  sovereign  in  Scotland,  according  to  the  remark  of  a  recent  writer, 
"is  seldom  seen,  except  in  the  card-purse  of  an  old  maid,  or  in  the  cabinet 
of  some  recluse  virtuoso:  and,  in  one  instance,  a  bank  was  established,  whose 
foundation  was  a  large  amount  of  guineas  ;  but  they  remained  in  the  bank 
undiminished,  and  were  only  taken  out  to  be  exchanged  for  sovereigns  at 
the  time  of  the  new  coinage."  — Laivson's  History  of  Bajiking,  page  435. 


422  CRITERION    OF    CURRENCY. 

sovereigns  instead  of  their  one-pound  notes,  has  been  resisted  by 
the  whole  nation.  The  circulation  of  bank-notes  in  Scotland  is, 
no  doubt,  quickened  by  the  cash  credit  system,  which  is  regarded 
by  the  banks  as  one  of  the  most  efficient  means  of  enlarging  and 
keeping  up  their  circulation.  The  average  amount  of  bank-notes 
in  circulation  in  Scotland  is  about  four  millions  of  pounds  ster 
ling  ;  the  amount  annually  exchanged  between  the  banks,  at  the 
semi-weekly  clearing  at  Edinburgh,  is  one  hundred  millions ; 
and  as  this  does  not  include  the  exchanges  of  banks  in  the  same 
city,  or  the  movement  of  the  notes  in  and  out  of  the  respective 
banks,  and  their  branches,  it  indicates  a  very  active  circulation, 
involving  a  large  aggregate  in  the  whole  movement. 

In  England,  public  men  have  spent  much  time  in  discussing 
the  questions,  whether  banks  should  be  governed,  in  the  amount 
of  their  issues,  by  the  foreign  exchanges,  or  by  the  fluctuations 
in  quantity  of  bullion  and  coin :  leading  men  have  long  be 
lieved  that  the  banks  should  establish,  as  a  criterion  of  their 
circulation,  one  or  the  other.  In  Scotland,  the  principle  has 
long  since  been  adopted,  that  the  issues  of  the  banks  should  be 
governed  by  the  course  of  domestic  trade,  and  the  legitimate 
business  of  the  customers  of  the  banks :  the  banks  there  look 
upon  the  movements  of  specie,  and  the  fluctuations  of  the  ex 
changes,  as  proceeding  from  causes  too  special  and  peculiar  to 
be  admitted  as  indications  of  what  should  determine  their  whole' 
policy,  or  affect  the  whole  business  of  a  country.  In  regard  to 
the  rate  of  interest,  the  Scottish  banks  have,  in  some  degree, 
been  guided  by  the  rates  in  London ;  and  they  have,  therefore, 
raised  the  rates  upon  occasions  of  premium  in  the  London 
money-market,  and  this  for  two  reasons  —  one,  because  it  was  a 
time  in  which  they  could  increase  their  profits ;  and  another,  that 
they  might  not  be  troubled  with  applications  for  loans  from 
England.  The  rate  of  interest  is  not  so  much  employed,  as  in 
England,  to  reduce  their  issues ;  for,  in  times  of  pressure,  that 
never  was  the  course  pursued  towards  their  regular  customers. 
They  continue  their  usual  advances  to  their  customers,  through 
every  commercial  pressure  and  disturbance. 

The  superior  working  of  the  Scottish  banking  system,  whether 


REPORT     ON    SCOTTISH     BANKING.  423 

judged  by  its  history  or  its  present  position,  and  however  reluc 
tantly  the  admission  may  be  made,  is  incontestable.  But  few 
failures  of  banks  take  place  in  Scotland,1  and  these  have,  for  the 
most  part,  been  disastrous  only  to  the  stockholders.  The  banks 
of  Scotland  have  never  inflicted  any  heavy  losses  upon  the 
people ;  they  have  never,  directly  nor  indirectly,  spread  disaster 
and  ruin  over  the  whole  community  in  which  they  are  placed ; 
they  have  never  contracted  their  issues  so  rapidly,  as  seriously 
to  injure  their  customers ;  they  have  never  suffered  any  general 
discredit,  by  which  their  notes  have  been  thrown  back  upon 
them,  to  the  injury  or  the  cessation  of  business  from  impeded 
circulation.  When  the  Bank  of  England  was  obliged,  in  1797, 
to  throw  itself  upon  the  protection  of  the  government,  and  accept 
from  the  Privy  Council  an  order  not  to  pay  specie,  the  banks  of 
Scotland  asked  no  such  order,  and  made  no  change  in  their  mode 
of  business.  Yet  there  was  no  run  for  gold  upon  the  Scotch 
banks.  This  is  fully  acknowledged  in  the  Report  of  a  Select 
Committee  to  the  House  of  Lords,  in  1826.  "  It  is  proved  by 
the  evidence,  and  by  the  documents,  that  the  banks  of  Scotland, 
whether  chartered  joint-stock  companies,  or  private  establish 
ments,  have,  for  more  than  a  century,  exhibited  a  stability  which 
the  committee  believe  to  be  unexampled  in  the  history  of  bank 
ing  ;  that  they  supported  themselves,  from  1797  to  1812,  with 
out  any  protection  from  the  restriction  by  which  the  Bank  of 
England,  and  that  of  Ireland,  were  relieved  from  cash  pay 
ments  :  that  there  was  little  demand  for  gold  during  the  late 
embarrassments  in  the  circulation  [in  1825-6] ;  and  that,  in  the 
whole  period  of  their  establishment,  there  are  not  more  than  two 
or  three  instances  of  bankruptcy.  As,  during  the  whole  of  this 
period,  a  large  portion  of  their  issues  consisted  almost  entirely 
of  notes  not  exceeding  XI,  or  £1  Is.,  there  is  the  strongest  rea 
son  for  concluding  that,  as  far  as  respects  the  banks  of  Scotland, 
the  issue  of  paper  of  that  denomination  has  been  found  compati 
ble  with  the  highest  degree  of  solidity ;  and  that  there  is  not, 

1  Only  five  or  six  in  a  century.  Not  more  than  two  have  failed  to  pay 
their  deposits  and  their  circulation.  The  one  of  1857  may  prove  to  be  one 
of  the  worst. 


424         REPORT    TO    THE    HOUSE    OF    COMMONS. 

therefore,  while  they  are  conducted  on  the  present  system,  suffi 
cient  ground  for  proposing  any  alteration,  with  the  view  of  add 
ing  to  a  solidity  which  has  so  long  been  sufficiently  established." l 
The  committee  bear,  in  the  same  report,  emphatic  testimony  to 
the  advantage  of  cash  credits,  and  also  to  the  custom  of  receiving 
deposits  of  small  sums,  and  paying  on  the  same  about  one  per 
cent,  below  the  current  rate  of  interest. 

The  testimony  on  which  the  report  is  founded  is  printed  at 
length,  and  we  look  upon  it  as  quite  strong  enough  to  extort 
this  favorable  opinion,  even  from  those  who  regarded  the  Scot 
tish  system  with  no  friendly  eye.  Equally  strong  and  more 
fully  detailed  statements,  favorable  to  the  Scotch  banks,  were 
made  in  the  same  year  by  the  witnesses  called  before  the  Select 
Committee  of  the  House  of  Commons  —  testimony  which  drew 
from  that  committee  an  equally  decided  opinion,  that  the  Scot 
tish  system  needed  no  present  reform.  The  latter  committee, 
of  which  Sir  Robert  Peel  was  chairman,  after  stating  that  they 
regarded  the  chief  inquiry  submitted  to  them  to  be,  whether 
Scotland  should  be  permitted  to  retain  her  circulation  of  bank 
notes  between  <£!  and  <£5,  in  the  face  of  the  fact  that  England, 
after  1829,  would  have  no  bank-notes  under  <£5,  say  that,  upon 
the  evidence  submitted  to  them,  they  "  cannot  advise  that  a  law 
should  now  be  passed,  prohibiting,  from  a  period  to  be  therein 
determined,  the  future  issue  in  Scotland  of  notes  under  <£5." 
They  further  say  that  they  are  "  unwilling,  without  stronger 
proof  of  necessity,  to  incur  the  risk  of  deranging,  from  any 
cause  whatever,  a  system  admirably  calculated,  in.  their  opinion, 
to  economize  the  use  of  capital,  to  excite  and  cherish  a  spirit  of 
useful  enterprise,  and  even  to  promote  the  moral  habits  of  the 
people,  by  the  direct  inducements  it  holds  out  to  the  mainte 
nance  of  a  character  for  industry,  integrity  and  prudence."' 

It  is  quite  evident,  however,  that  all  these  strong  expres 
sions  in  favor  of  the  Scottish  banking  system  are  made,  in  Eng 
land,  with  great  mental  reservation.  They  look  upon  it  as 
unsound  in  theory,  and  practicable  only  in  Scotland.  Whilst 

1  See  pages  3  and  4  of  the  Lords'  Report,  1826. 

2  Commons'  Report,  same  year,  pp.  9-11. 


THE    CONTRAST    RENEWED.  425 

they  do  not  question  the  testimony  of  the  witnesses,  they  remain 
unconvinced  of  the  general  merits  of  a  system  upon  which  they 
bestow  such  strong  special  commendation.  Both  committees 
betray  great  apprehension  that  the  one-pound  notes  of  Scotland 
will  find  their  way  into  England,  and,  to  some  extent,  displace 
the  metallic  circulation  under  five  pounds,  for  which  they  had 
made  provision  there  ;  and  they  both  intimate  that  they  would 
prefer  the  prohibition  of  the  one-pound  notes  in  Scotland,  rather 
than  permit  them  any  circulation  in  England.  They  admit  that 
the  Bank  of  England  suspended  in  1797,  after  having,  since 
1777,  issued  nothing  less  than  five-pound  notes ;  whilst  the  Scot 
tish  banks  did  not  suspend,  upon  a  circulation  of  one-pound 
notes.  They  had  reached  the  conclusion,  in  England,  that  the 
currency  under  five  pounds  should  be  gold ;  and  from  that  con 
clusion  Scottish  experience  could  not  drive  them.1  In  Scotland, 
the  views  of  the  people  are  fully  settled,  on  the  subject  of  the 
currency :  their  system,  which,  by  the  admission  of  all,  has 
worked  wonders  for  the  progress  of  Scotland,  is  one  of  which 
they  only  ask  the  undisturbed  enjoyment.  In  England,  on  the 
topics  of  money,  currency  and  banking,  nothing  is  settled ;  and 
showers  of  books  and  pamphlets  are  poured  out  upon  occasion 
of  every  commercial  crisis,  every  renewal  of  the  bank  charter, 
and  upon  every  public  event,  by  which  the  attention  of  the 
people  is  strongly  drawn  to  the  subject.  In  Scotland,  the  topic  is 
seldom  the  subject  of  agitation,  unless  as  connected  with  some 
of  the  movements  or  projects  of  reform.  In  England,  there  is  a 
prevailing  prejudice  against  a  paper  currency,  although  it  is 
largely  employed ;  and  a  preference  for  a  gold  currency  per 
vades  all  classes.  In  Scotland,  the  preference  for  a  paper  cur 
rency  is  as  strongly  marked,  in  all  the  channels  of  business. 
Neither  the  rebellion  of  1715,  nor  1745,  nor  the  disturbances 
following  upon  the  French  Revolution  of  1793  and  1797,  which 
stopped  the  Bank  of  England,  nor  the  grand  crash  among  the 
English  banks  in  1825,  could  alarm  the  Scotch  people,  or  pro 
duce  a  run  upon  their  banks.  No  currency  of  modern  times  has 

1  English  pride  refused  the  lesson ;  English  fairness  let  the  Scotch  banks 
alone. 


426  TWO    LESSONS    IN    BANKING. 

been  more  effective,  and  less  fluctuating  in  value  and  quantity, 
than  that  of  Scotland.  This  is  expressly  admitted  by  commit 
tees  of  both  Houses  of  the  British  Parliament ;  it  is,  in  fact,  un 
deniable,  and  yet  is  regarded  in  England  as  proving  nothing  — 
establishing  nothing  beyond  this,  that  the  people  of  Scotland 
ought  to  be  allowed  to  enjoy  it  so  long  as  the  Scotch  bank-notes 
can  be  kept  on  their  own  side  of  the  Tweed.  We  refer  to  this, 
-to  show  in  what  a  narrow  spirit  the  subject  is  considered  in 
England. 

There  are  two  great  lessons  in  currency,  tendered  by  long  ex 
perience  and  unquestioned  facts,  from  which  the  English  people 
have  failed  to  draw  the  instruction  they  afford  —  the  banking 
system  of  Scotland,  and  the  history  of  the  Bank  of  England 
from  1797  to  1822.  A  thorough,  able,  and  honest  examination 
of  these  great  lessons  is  yet  to  come  from  the  friends  of  the 
English  system.  We  should  not  say  English  system ;  there  is 
no  system  in  England,  unless  it  be  that  of  the  Bank  of  England  ; 
all  else  is  unsettled,  both  in  general  policy  and  private  opinion. 
There  is  a  prevalent  idea  among  statesmen  and  writers  upon 
money,  that  there  should  be  a  broad  basis  of  money  or  gold 
coin,  under  and  as  a  support  to  the  paper  circulation ;  and  it  is 
this  idea  which  banishes  all  bank-notes  under  five  pounds.  Upon 
this  another  opinion  has  more  recently  grown  up,  and  become  a 
law  in  the  act  of  1844,  that  a  paper  currency,  to  be  perfect, 
should  fluctuate  as  a  gold  currency  would  do,  if  it  were  the  sole 
medium  of  payment.  To  the  mind  of  a  Scotch  banker,  a  greater 
absurdity  could  not  be  presented  in  as  many  words.  He  would 
say: — "What!  when  a  demand  springs  up  for  gold,  in  conse 
quence  of  some  foreign  war,  must  we  so  regulate  the  issues  of 
our  banks,  as  to  reduce  the  currency  of  notes  in  the  same  pro 
portion  that  the  currency  of  gold  M  carried  off!  Rather  should 
we  increase  our  issues,  and  supply  the  place  of  the  currency 
that  is  exported."  They  know  that  bank-notes  can  fully  dis 
charge  the  functions  of  money,  for  they  see  it  every  day ;  and 
not  only  so,  but  they  are  certain  that  almost  no  business  of  Scot 
land  is  carried  on  by  means  of  a  currency  of  gold.  The  Scot 
tish  people  can  never  be  made  to  comprehend  why  their  bank- 


THE     LEVEL    OF    GOLD.  427 

notes,  bank  deposits,  and  cash  credits,  should  fluctuate  in  amount 
as  gold  would  fluctuate,  if  exclusively  employed.  These  forms 
of  currency  do  not  come  of  gold  ;  they  are  not  founded  upon  it, 
and  they  have  nothing  to  do  with  it.  In  Scotland  they  under 
stand,  as  well  as  they  do  in  England,  the  use  of  gold  as  money  ; 
they  know  its  value  as  a  commodity,  but  being  a  costly  com 
modity,  they  do  not  incline  to  employ  it  as  a  currency,  ex 
cept  so  far  as  their  bank  currency  fails  of  its  object;  nor  do  they 
wish  to  purchase  or  hold  it  as  a  commodity,  except  for  such 
Special  purpose  as  may  promise  adequate  advantage.  Their 
system  of  banking  enables  them  to  dispense  with  it  almost 
entirely.  In  this,  they  are  far  from  thinking  themselves  behind 
their  neighbors,  in  intelligence  or  financial  skill.  Sir  Walter 
Scott,  in  the  Letters  already  referred  to,  on  the  subject  of  the 
reform  in  Scotch  banking  projected  in  England  in  1826,  says, 
in  referring  to  the  oft -repeated  metaphor,  that  gold,  like  water, 
will  find  its  level;  —  "A  metaphor  is  no  argument  in  any  in 
stance  ;  but  I  think  I  can  contrive,  in  the  present,  to  turn  this 
water  engine  against  those  who  employ  it.  Scotland,  sir,  is  not 
beneath  the  level  to  which  gold  flows  naturally.  She  is  above 
that  level,  and  she  may  perish  for  want  of  it  ere  she  sees  a 
guinea,  without  she,  or  the  State  for  her,  be  at  the  perpetual 
expense  of  maintaining,  by  constant  expenditure,  that  metallic 
currency  which  has  a  natural  tendency  to  escape  from  a  poor 
country  back  to  a  rich  one."  —  "In  countries  where  gold  is  in 
dispensable,  it  must  be  obtained,  whatever  price  is  given  for  it 
while  the  means  of  paying  such  a  price  remains." 1  Scotland, 

1  See  Third  Letter  of  Malaclii  Malagrowther  to  the  "  Edinburgh  Weekly 
Journal,"  page  16.  The  position  of  the  writer  is  further  illustrated  as 
follows :  — 

"  If  my  friend  would  consult  the  clerk  of  the  Water  Company,  at  his 
office  in  the  Royal  Exchange  [Edinburgh],  he  would  explain  the  matter  at 
once.  'Let  me  have/  says  Mr.  Chrysal,  '  a  pipe  of  water  to  my  house/ — 
'Certainly,  sir;  it  will  cost  you  forty  shillings  yearly/  —  'The  devil  it 
will!  Why,  surely,  the  Lawnmarket  is  lower  than  the  Reservoir  on  the 
Castlehill?  It  is  the  nature  of  water  to  come  to  a  level.  What  title  have 
you  to  charge  me  money,  when  the  element  is  only  obeying  the  laws  of 
nature,  and  descending  to  its  level?'  —  '  Very  true  sir/  replies  the  clerk; 


428      POINTS    OF    VIEW    IN    THE    TWO    COUNTRIES. 

according  to  the  views  of  Sir  Walter  Scott,  did  not  employ  a 
gold  currency,  because  it  had  to  be  purchased  and  paid  for  ;  and 
she  had  no  inducement  to  make  so  expensive  a  purchase,  in  the 
face  of  a  fact  which  long  experience  had  taught  her  that  she 
could  do  better  without  it ;  that  her  people  preferred  the  bank 
currency  to  the  gold.  The  views  of  Sir  Walter  Scott,  in  his 
celebrated  pamphlet,  were  emphatically  seconded  by  his  coun 
trymen  of  every  class ;  and  they  retained  their  well-tried  paper 
system,  which,  though  convertible  by  law,  as  in  England,  is  so 
wisely  adjusted,  that  a  run  upon  the  banks  for  gold  or  silver  is 
an  event  which  has  not  occurred  for  a  century  in  Scotland. 

The  position  occupied  by  banks  in  England  and  Scotland, 
in  the  eyes  of  the  people,  is  widely  different.  In  England,  the 
people  are  taught  to  look  to  the  test  of  convertibility  of  liabili 
ties  into  gold,  or  payment  on  demand,  as  the  only  right  crite 
rion,  of  the  solvency  of  banks ;  they  well  know,  nevertheless, 
that  this  convertibility  is  not  possible.  Every  bank  is  regarded 
as  having  undertaken  what,  if  called  upon,  it  could  not  perform ; 
and  every  man  is  left  to  exercise  his  discretion  about  the  degree 
of  forbearance  he  can  safely  exercise.  In  times  of  commercial 
prosperity,  the  distrust  which  this  view  of  the  banks  generates, 
in  a  greater  or  less  degree,  in  all  minds  may  be  latent  and  un 
seen  ;  but  the  moment  any  cause  of  alarm  arises,  this  distrust  is 
roused  to  fearful  energy  and  action.  Every  man's  apprehensions 
are  multiplied  by  his  estimate  of  other  people's  fears ;  and  in 
England,  as  well  as  in  the  United  States,  a  run  upon  the  banks,  to 
some  extent,  is  inevitable  in  a  time  of  commercial  derangement 
or  disturbance.  When  the  banks  sustain  themselves  upon  such 
occasions,  it  is  often  regarded  as  a  triumphant  proof  of  their 
solidity  and  strength,  though  the  merciless  process  by  which  the 

'  but  then  it  was  no  law  of  nature  brought  it  to  the  Reservoir,  at  a  height 
which  was  necessary  to  enable  us  to  disperse  the  supply  over  the  city.  On 
the  contrary,  it  was  an  exertion  of  art,  in  despite  of  nature.  It  was  forced 
hither  by  much  labor  and  ingenuity.  Lakes  .were  formed,  aqueducts  con 
structed,  rivers  dammed  up,  and  pipes  laid  for  many  miles.  Without  im 
mense  expense,  the  water  could  never  have  been  brought  here;  and  without 
your  paying  a  rateable  charge,  you  cannot  have  the  benefit  of  it.' ;;  — Ibid. 
page  17. 


SCOTTISH    FAITH    IN    BANKS.  429 

banks  defend  themselves,  by  contracting  the  currency,  has  in 
flicted  losses  upon  individuals  to  many  times  the  amount  of  all 
the  coins  in  the  banks.  Under  the  English  system,  every  attack 
upon  the  banks  is  inevitably  attended  by  an  attack  of  the  banks 
upon  their  customers,  and,  through  them,  upon  the  whole  com-* 
munity.  To  save  a  million  of  gold,  lying  unemployed  in  their 
vaults,  the  banks  will  diminish  the  active  paper  currency  two  or 
three,  or  even  ten  millions.  The  banks  of  England  are  looked 
upon,  then,  by  the  people,  as  institutions  exposed  to  great  risk, 
and  as  capable,  in  times  of  commercial  trouble,  of  inflicting  ter 
rible  losses  upon  the  community  in  which  they  are  placed  ;  they 
are  isolated,  each  one  standing  upon  its  own  strength,  and  fre 
quently  as  prompt  to  sacrifice  -each  other,  in  averting  the  dreaded 
suspension,  as  to  fall  upon  their  customers  by  the  process  of 
contraction.  In  England  and  in  the  United  States,  an  unappeas 
able  jealousy  of  banks  pervades  a  large  portion  of  the  people, 
which  requires  little  special  provocation  to  rouse  into  active 
enmity  and  opposition. 

In  Scotland  there  is  no  jealousy  of  the  banks ;  they  are  not 
hated  as  monopolists,  nor  distrusted  as  unsafe.  They  stand 
together  as  one  mass,  prepared  to  uphold  each  other  in  every 
danger,  and  to  sustain  their  customers  in  time  of  trial.  The  con 
tractions  of  currency  which,  in  England,  prove  such  a  severe 
scourge,  the  power  of  employing  which  the.  banks  there  regard 
as  one  of  their  most  important  privileges,  are  unknown  in  Scot 
land. 

The  Scottish  banks  have,  from  their  commencement,  received 
deposits  as  low  as  £10,  and  some  even  less,  upon  which  they 
paid  interest  at  about  one  per  cent,  less  than  the  current  rate. 
The  deposits  thus  made  for  the  sake  of  accumulation,  ranging 
from  £10  upwards,  have  for  a  long  period  exceeded  ten  millions 
sterling,  perhaps  they  now  exceed  fifteen.  This  is  the  interest 
which  the  masses  have  in  the  banks  of  Scotland.  The  confidence 
of  these  depositors  is  so  great,  that,  since  the  introduction  of 
savings  banks  in  Scotland,  the  poor  commence  their  savings  in 
them  by  shillings,  and  continue  their  economy,  until  they  have 
succeeded  in  accumulating  £10,  which  they  carry  to  a  bank  for 


430  ESPRIT     DU     CORPS. 

a  regular  deposit  receipt.  The  Scotch  banks  are  the  pride  of 
the  people ;  all  their  spare  money  is  at  interest  in  them ;  and, 
never  hearing  the  language  of  distrust  or  opposition,  no  fear  or 
apprehension  crosses  their  minds.  No  one  has  ever  heard  of  a 
difficulty  in  collecting  principal  or  interest,  or  in  reinvesting  them 
together.  The  people  know  that  all  the  notes  of  all  the  banks 
are  good  over  all  Scotland ;  and  that,  if  a  suspicion  were  raised 
against  any  one  bank,  the  others  would  make  a  point  of  giving 
their  own  notes  for  those  suspected.  It  would  be  difficult  to  find 
a  man  in  Scotland  in  whom  a  doubt  existed,  or  could  be  planted, 
of  the  entire  soundness  of  all  their  banks,  now  and  hereafter. 
The  system  of  redemption  semi-weekly  between  all  the  banks,  and 
their  many  local  exchanges,  give  them  such  an  oversight  of  their 
respective  operations,  that  they  have  less  fear  of  each  other's 
solvency  than  the  isolated  banks  of  England.  The  banks  of 
Scotland,  consisting  mainly  of  branches  of  a  small  number  of 
banks  situated  in  the  chief  towns,  are  governed  by  a  policy  which 
is  uniform,  and  equally  designed  for  the  benefit  of  the  whole 
people,  and  the  safety  of  the  banks.  This  esprit  du  corps  which 
prevails  among  the  banks  in  Scotland,  has  been  strongly  cen 
sured  in  England  as  likely  to  lead  to  over-issues,  relying  on 
mutual  aid ;  but  it  must  be  noted  that  there  is,  among  the  banks 
there,  not  only  a  disposition  to  protect  each  other  in  danger, 
but  an  equally  strong  tendency  to  watch  each  other  at  all  times. 
Their  respective  interests  demand  this,  and  their  close  associa 
tion  makes  this  watchfulness  effective.  Whilst  all,  therefore,  are 
disposed  to  help  each  one  that  may  need  aid,  all  are  equally  in 
terested  to  restrain  the  tendency  of  any  one  to  go  astray. 

The  complete  success  of  the  Scottish  banking  system,  during 
a  century  and  a  half,  while  it  commands  the  admiration  of  those 
who  study  it  with  proper  attention,  does  not  always  convince 
them  that  it  could,  with  equal  advantage,  be  transplanted  in 
another  soil.  It  might  be  long  before  that  confidence  in  banks, 
which  exists  in  Scotland,  could  be  inspired  elsewhere.  A  popu 
lar  writer,  referring  to  this,  says ,  —  "  The  credit  of  one  esta 
blishment  might  be  doubted  for  the  time  —  that  of  the  general 
system  was  never  brought  in  question.  Even  avarice,  the  most 


FEW    SCOTTISH    WRITERS    ON    CURRENCY.      431 

suspicious  of  passions,  has,  in  no  instance  I  ever  heard  of,  desired 
to  compose  her  hoards  by  an  accumulation  of  the  precious  metals. 
The  confidence  in  the  credit  of  our  ordinary  medium  has  not  been 
doubted,  even  in  the  dreams  of  the  most  irritable  and  jealous  of 
human  passions."  If  this  extraordinary  faith  in  bank  currency 
is  of  long  growth  in  Scotland,  and  therefore  not  readily  transfer 
able  elsewhere,  there  must  at  least  be  something  in  the  system 
which  promoted  that  steady  growth,  and  which  warded  off  all 
those  accidents  and  commercial  troubles  which  elsewhere  have 
not  only  destroyed  confidence  in  banks,  but,  through  them,  in 
flicted  incalculable  mischiefs  upon  the  people.  It  is  in  this 
aspect  that  the  history,  constitution  and  practice  of  the  Scot 
tish  banks  has  not  been  properly  studied  out  of  Scotland,  nor 
even  in  it.  The  value  of  the  system  is  fully  appreciated  at 
home,  but  no  Scottish  writer  has  yet  shown  what  elements  in  the 
system  have  given  it  such  a  large  and  firm  growth.  We  are  far 
from  competent  to  this  task,  even  if  our  space  would  admit  of  it, 
We  refer  to  one  peculiarity  in  Scotland,  without,  however,  look 
ing  for  its  origin  :  it  is  fixed  in  the  minds  of  the  Scottish  people, 
that  whatever  will  fully  perform  the  functions  of  money,  in  pur 
chase  and  payments,  is  as  good  as  money  for  them ;  and,  if 
cheaper  and  more  convenient,  it  is  to  be  preferred  and  employed. 
Such  a  substitute  they  find  their  bank  currency  to  be.  They  see 
and  know  that  it  does  not  perform  these  functions  in  virtue  of 
its  being  convertible,  but  that  it  answers  the  end  designed,  like 
a  steam-engine,  because  it  is  properly  devised  for  the  purpose. 
They  know  that  men  pay  their  debts  by  balancing  their  books 
of  account,  and  that  the  debts  so  paid  are  well  and  fully  paid ; 
and  they  know  equally  well,  that  the  debts  paid  by  the  agency 
of  their  bank-notes  are  also  fully  and  properly  discharged.  They 
know  that,  in  all  this,  there  is  no  intervention  of  money  or  the 
precious  metals.  In  Scotland  they  look,  therefore,  upon  coined 
money  as  a  thing  to  be  obtained  and  employed  when  there  is 
need  for  it.  They  are  so  satisfied  with  their  present  modes  of 
payment,  that  they  have  no  more  desire  of  replacing  their  one- 
pound  notes  with  sovereigns,  than  a  man  of  business  has  to  wear 
buttons  of  gold,  or  to  drink  from  vessels  of  gold,  because  it  is 


432  OPINIONS    IN    ENGLAND. 

a  substance  of  real  value.  In  Scotland  the  people  have  no  fear 
of  their  banking  system  breaking  down ;  they  can  see  no  possi 
bility  of  that,  so  long  as  they  continue  their  confidence.  They 
do  not  regard  it  as  resting  upon  gold ;  and  if  the  directors  of  the 
Scottish  banks  were  to  send  their  whole  stock  of  gold  to  London, 
reserving  only  what  might  be  needful  for  change,  and  the  sup 
ply  of  travellers  to  England,  it  would  create  no  panic  nor  run. 
They  know  that  their  banking  system  is  a  device  to  effect  pay 
ments  in  their  business,  not  dependent  upon  gold  for  its  power 
or  validity.  In  the  way  of  business,  those  who  have  bank-notes 
are  sure  that  they  can,  at  any  time,  buy  as  much  gold  as  they 
may  require  ;  but  they  no  more  think  of  turning  their  bank-notes 
into  gold,  unless  it  is  needed  for  a  particular  purpose,  than 
of  turning  them  into  precious  stones.  Such  is  the  long  and 
deeply-settled  feeling  and  opinion  of  the  Scottish  people  ;  and  it 
is  no  doubt  due  to  some  element  in  their  system,  the  influence 
of  which  has  not  yet  been  sufficiently  understood. 

The  feeling  and  opinion  in  England,  on  this  subject,  is,  as  we 
have  already  remarked,  very  different.  They  look  upon  the  pre 
cious  metals,  but  especially  gold,  as  being  the  only  legitimate 
medium  of  payment.  All  substitutes  are  not  only  to  be  subordi 
nate  to  it,  but  convertible  into  it  on  demand.  It  is  true  that 
notes  of  the  Bank  of  England  are,  by  law,  a  legal  tender  —  a 
relic  of  the  long  suspension,  the  retention  of  which  has  never 
been  officially  explained ;  but  no  doubt  it  is  on  the  ground  that 
the  whole  power  and  means  of  the  government  would  be  applied, 
if  needful,  in  aiding  the  bank  to  pay  specie.  In  England,  the 
idea  of  convertibility  is  kept  up  in  connection  with  all  kinds  of 
paper  currency,  and  the  people  have  learned  to  infer  that  the 
effectiveness  of  paper  currency  is  dependent  upon  its  being  con 
vertible.  The  real  office  of  paper  currency,  its  power  and 
economy,  are  lost  sight  of  in  the  absorbing  feeling  that  it  should 
be  convertible ;  and  that  being  the  case,  they  attribute  all  the 
efficacy  of  paper  currencies  to  the  fact  of  its  being  payable  on 
demand.  All  its  powers,  as  it  is  regarded,  are  due  to  gold  in 
the  last  analysis.1  This  is  so  fully  contradicted  by  facts,  past  and 

1  We  must  remind  the  reader,  that  we  are  not  arguing  against  the  pro- 


EXTREME  JEALOUSY  OF  BANKS.       433 

present,  as  to  show  that  the  subject,  from  some  cause,  has  not 
received  a  candid  consideration.  The  Clearing-house  of  London 
is  a  standing  and  unanswerable  proof,  that  the  great  payments 
of  commerce  can  be  made  with  more  economy  and  dispatch  by 
the  use  of  securities,  books  of  account,  and  set-off,  than  by  any 
possible  use  of  gold.  This  prejudice  against  paper  currency  in 
England,  to  which  the  people  are  so  much  indebted  in  national, 
as  well  as  in  private  affairs,  and  which  they  employ  so  largely, 
is  detected  in  every  glance  we  take  at  the  condition  of  the  coun 
try  for  the  last  century  and  a  half.  It  is  seen  in  the  opposition 
to  the  Bank  of  England,  from  its  origin,  in  the  fact  that  the 
paper  of  the  Bank  of  England  is  not  received  out  of  London 
with  anything  like  the  readiness  with  which  the  notes  of  the 
Scotch  banks  circulate.  The  local  banks  of  England  have  but 
a  very  circumscribed  circulation,  whilst  the  notes  of  the  Scotch 
banks  circulate  with  equal  facility  over  all  the  country.  As  early 
as  1777,  <£!  and  <£2  notes  were  prohibited  in  England.  The 
extreme  jealousy  with  which  the  Restriction  of  1797  was  regarded, 
was  seen  in  the  many  contrivances  which  were  resorted  to,  to 
keep  it  in  force  without  appearing  to  give  it  too  full  a  sanction. 
The  feeling  with  which  the  measure  was  viewed  may  be  gathered 
from  the  publication  by  Lord  King,  in  1803  and  1804,  from  the 
Report  of  the  Earl  of  Liverpool  to  the  King  in  1805,  from  the 
speeches  of  the  Opposition  in  Parliament,  but  more  fully  from 
the  Bullion  Report  in  1810,  and  the  discussions  which  followed, 
both  in  and  out  of  Parliament.  The  jealousy  of  paper  currency 
is  seen  in  the  interrogatories  propounded  to  bankers  and  mer 
chants  by  the  Parliamentary  committees  which  have,  at  various 
times  during  the  last  half  century,  had  the  subjects  of  money, 
banking  and  credit  before  them.  The  witnesses  from  Scotland 
before  the  Committee  of  Banks  of  Issue,  in  1841,  were  pressed 
with  questions  in  regard  to  their  exclusive  paper  currency,  in 


priety  or  necessity  of  convertibility  as  a  check  upon  banks,  for  that  is  a 
question  which  must  be  considered  by  itself;  but  we  are  insisting  that  con 
vertibility  is  not  the  ground  upon  which  the  effectiveness  and  power  of 
paper  currency  rests. 

28 


434          EFFECT    OF   BANK    ISSUES    ON    PRICES. 

terms  which  clearly  reveal  the  doubts  of  the  interrogators.1 
After  a  very  full  defence  and  explanation  of  the  system  of  cur 
rency  had  been  given,  they  were  asked,  in  every  manner  in 
which  the  question  could  be  varied,  whether  the  issue  of  paper 
did  not  in  some  way  become  a  capital,  and  whether  the  abund 
ance  of  the  paper  currency  did  not,  as  money  or  capital,  affect 
prices.  The  witnesses  all  replied  in  the  negative ;  they  well 
knew  that  such  was  not  the  fact,  for  the  whole  circumstances  and 
results  were  before  them.  They  did  not  succeed  in  explaining  why 
prices  were  not  affected,  in  a  manner  to  satisfy  minds  so  prepos 
sessed  as  their  interrogators.  As  this  question  is  often  asked,  with 
out  being  properly  answered,  we  offer  an  explanation  which  should 
never  be  omitted  in  that  inquiry,  whatever  else  may  be  brought 
to  bear  upon  it.  Whenever  the  paper  currency  issued  by 
banks  is,  by  their  system  of  banking,  in  continual  and  effective 
demand,  it  has  no  undue  effect  upon  prices,  or,  in  other  words,  it 
has  no  tendency  to  depreciate,  by  which  prices  would  seem  to  be 
increased.  When  all  the  issues  of  a  bank  are  in  demand,  to  pay 
debts  to  the  bank  maturing  every  day,  thereby  producing  a 
daily  current  of  the  notes  to  the  bank,  they  do  not  affect  prices, 
because,  being  in  constant  demand  to  pay  for  purchases  already 
made,  they  can  have  little  influence  upon  current  prices.  Their 
functions  are  not  to  originate  new  business,  but  to  adjust  that 
which  is  past ;  they  are  subject  to  an  imperative  and  absorbing 
demand,  which  prevents  their  free  action  on  prices.  Prices,  as 
we  shall  explain  in  a  chapter  on  that  subject,  are  not  so  much 
made  in  reference  to  currency  or  money,  as  in  reference  to  the 
feelings,  opinions  and  estimates  of  men  of  business.  The  great 
purchases  and  sales  of  industry  and  trade  are  nearly  all  made 
upon  the  individual  credit  of  the  dealers,  who  are  not  governed, 
in  fixing  the  price,  by  the  quantity  of  money,  so  much  as  by 
the  probable  demand,  the  needs  of  consumption,  and  other  like 
considerations ;  purchases  and  sales  being  made  on  the  security 
of  individual  paper,  are  not  dependent  upon  the  quantity  of 
money. 

1  Second  Report  on  Banks  of  Issue,  pp.  174-5. 


MISTAKEN    APPREHENSIONS.  435 

But  apprehensions  about  paper  currency  even  find  place  in 
the  minds  of  intelligent  men  in  Scotland.  In  referring  to  an 
instance  of  this,  we  offer  a  word  of  explanation  to  that  class  of 
men,  who,  though  intelligent  and  unprejudiced,  look  upon  paper 
•currency  as  something  unsubstantial,  dangerous,  and  only  to  be 
tolerated  for  a  time,  and  until  something  better  can  be  obtained. 
We  find  the  following  passages  in  the  account  of  "  The  Scottish 
Banking  Institutions,"  drawn  up  by  William  Chambers,  for  his 
"Book  of  Scotland."  It  is  the  best  popular  account  of  these 
banks  we  have  found,  and  will  repay  the  reader  for  a  careful 
perusal. 

"  The  remarkable  fact  of  so  many  persons  trading  on  borrowed 
capital,  in  such  a  limited  country  as  Scotland,  can  give  but  an 
inadequate  notion  of  the  superficiality  of  wealth,  arid  the  hollow- 
ness  of  the  apparent  riches,  and  easy  circumstances,  of  many 
individuals  in  this  country. 

"  So  complicated  is  the  curious  mechanism  of  credit,  which  is 
interwoven  throughout  the  whole  fabric  of  society,  that  were  the 
thick  veil  torn  aside,  which  is  at  present  thrown  over  its  various 
workings,  a  scene  of  spectral  pecuniary  capacity  would  be  ex 
hibited,  which,  while  it  would  alarm  the  political  economist, 
would  horrify  and  astonish  those  who  usually  look  no  deeper 
than  the  surface  of  affairs.  But  though  paper  money  has  been 
decidedly  the  moving  cause  of  such  a  result,  it  must,  neverthe 
less,  not  be  viewed  in  the  light  of  an  instrument  of  evil ;  and  we 
have  no  doubt  that,  by  adhering  to  a  certain  mode  of  manage 
ment,  the  banks  will  eventually  be  the  means  of  instituting  a 
solid  for  a  specious  wealth.  .  .  . 

"  The  Scotch  notes  were  issued  only  as  a  succedaneum,  until 
a  certain  quantity  of  solid  wealth  was  generated ;  and  the  ques 
tion  thence  arises,  whether  the  nation  has  yet  arrived  at  that 
precise  epoch  when  their  services  can  be  dispensed  with.  This 
is  an  exceedingly  nice  point  of  inquiry ;  but  we  do  not  despair 
of  answering  it  satisfactorily.  Judging  dispassionately  of  the 
present  condition  and  prospects  of  the  nation,  we  are  satisfied 
that  the  time  has  not  come  when  the  Scotch  could  do  without 
notes ;  but  we  are  equally  convinced,  that  the  extension  of  their 


436  PROPERTY    A  X  D    SECURITIES. 

issues  may  be  attended  with  great  danger.  The  country  now 
enjoys  a  sufficiency  of  real  and  representative  capital  fit  for  all 
useful  purposes."  .  .  . 

"  That  an  epoch  is  steadily  and  gradually  advancing,  when 
the  money-broking  operations  of  Scottish  bankers  will  cease  to 
be  of  moment,  no  one  who  is  acquainted  with  the  increasing 
accumulation  of  wealth  will  be  able  to  deny.  The  banks  have, 
in  the  course  of  years,  been  reducing  the  rate  of  interest  they 
offer  for  money,  just  as  it  is  becoming  more  plentiful ;  and  such 
.a  procedure  tells  very  explicitly,  that  ere  long  moneyed  men 
will  more  frequently  lay  out  their  capital  on  speculations  of  their 
own,  than  lend  it  to  others  to  do  so  through  the  intervention  of 
banks.  At  present,  the  interest  of  two  per  cent,  will  gradually 
sink  to  one,  then  to  a  half  per  cent.,  and  finally  to  nothing. 
When  it  reaches  this  point,  it  will  be  a  pregnant  proof  that  the 
wealth  of  Scotland  is  on  a  tolerably  secure  footing,  and  that 
the  notes  have  nearly  realized  the  intention  of  their  creation."1 

These  extracts  are  taken  from  an  account  which  places  a  very 
high  estimate  upon  the  banks  and  banking  system  of  Scotland. 
In  the  midst  of  the  highest  appreciation  appear  these  qualifying 
paragraphs,  which  show  that  the  author  did  not  fully  under 
stand  the  nature,  power  and  necessity  of  paper  currency ;  and 
that  he  could  not,  therefore,  adequately  appreciate  its  value  to 
the  industry,  trade  and  progress  of  a  country.  As  similar  mis 
givings  occupy  other  minds  in  Scotland,  and  prevail  largely  in 
England,  we  shall  attempt  to  remove  at  least  a  part  of  the  mis 
apprehension  on  which  these  doubts  are  founded. 

There  is  a  plain  distinction,  universally  understood,  between  a 
tract  of  land  and  the  mortgage  which  is  granted  upon  it.  The 
one  is  the  land,  the  other  is  a  security.  There  is  a  like  distinc 
tion  between  a  hundred  bales  of  cotton  and  the  note  of  $4000 
with  which  it  is  purchased ;  the  note  is  merely  a  security.  If 
the  value  of  the  mortgaged  land  is  §5000,  and  the  mortgage 
given  is  for  that  amount,  it  cannot  be  said  that  the  capital  in 
volved  is  doubled,  the  land  and  the  mortgage  being  each  worth 


Chambers7  Book  of  Scotland,  pp.  34G-7,  3G1,  3C3. 


A    NEEDFUL    DISTINCTION.  4$7 

§5000.  There  is  no  increase  of  capital.  So,  when  a  hundred 
bales  of  cotton  are  sold,  and  a  note  for  $4000  is  received  upon 
the  delivery,  no  increase  of  wealth  or  capital  has  taken  place. 
The  cotton  may  be  the  subject  of  many  subsequent  sales,  and 
each  time  for  a  larger  sum,  but  no  increase  of  capital  results 
from  these  changes  of  ownership.  The  notes  taken  are  all  mere 
securities.  The  property  for  which  they  were  given  is  not  of 
sufficient  value  to  pay  them  all  at  the  same  time ;  but,  if  pro 
perly  managed,  as  it  created  all  these  securities,  so  it  can  be 
made  to  pay  them  all.  The  illustration  is  very  simple,  if  we 
suppose  the  cotton  to  have  passed  through  half  a  dozen  or  more 
hands,  and  to  have  come  back  to  the  original  owner.  It  has 
created  securities  to  the  amount  of  $24,000,  all  which  can  be 
discharged  by  the  last  purchaser  paying  the  first  seller.  The 
intermediate  creditors  will  give  up  their  securities,  to  be  acquitted 
of  their  debts.  If  any  of  the  notes  thus  given  should  be  carried 
to  a  bank,  and  exchanged  for  its  notes,  they  cannot  properly  be 
called  either  capital  or  money.  The  bank  cannot  make  money 
out  of  paper ;  it  cannot  make  of  paper  anything  but  securities. 
Their  assumed  convertibility  may  give  them  additional  credit, 
but  it  cannot  make  them  money.  They  are  promises  —  under 
takings  to  be  paid  in  money,  if  not  otherwise  adjusted.  It  is 
the  same  with  bank  deposits,  on  whjch  the  depositor  can  draw 
at  pleasure ;  they  are,  in  every  proper  sense,  securities,  not 
money.  If  it  were  otherwise,  money  could  be  manufactured  at 
pleasure  by  individuals  and  banks. 

The  yearly  product  of  the  industry  of  a  country,  when  sent 
into  channels  of  trade,  foreign  or  domestic,  is  the  annual  contri 
bution  of  labor  and  capital  to  its  wealth ;  and  is,  in  a  large  pro 
portion,  represented  by  the  personal  securities  taken  upon  sales 
as  they  occur.  The  commodities  are  bought  and  sold,  and  by 
this  means  distributed  ;  the  payments  accruing  from  these  trans 
actions  are  reserved  for  special  management.  The  amounts  to 
be  paid  are  found  in  the  securities  which  the  parties  took  as  the 
evidences  of  debt  and  credit,  and  as  necessary  for  their  safety. 
When  property  is  sold  more  than  once,  there  are  motives  and 
interests  which  ensure  a  good  security  upon  every  sale.  It  may 


438  MUTUAL    ADJUSTMENT. 

be  supposed  that  every  man  who  parts  with  property  for  a  secu 
rity,  will  exercise  that  judgment  and  caution  which  may  be 
expected  of  every  one  acting  for  his  own  interest.  For  the 
whole  mass  of  securities  extant  at  any  one  time,  there  is  the 
basis  of  all  the  commodities  for  which  they  were  given ;  and 
commodities,  like  money,  will  pay  debts,  if  they  circulate  as 
often  as  they  change  hands.  Every  new  security  to  which  the 
resale  of  a  commodity  gives  rise,  will  pay  the  debt  created  by 
the  preceding  sale.  If  A.  sells  to  B.,  and  B.  to  C.,  B.  can  use 
the  security  received  from  C.,  and  through  the  bank  pay  his 
debt  to  A.  The  commodities  then  travel  through  the  regular 
channels  of  trade,  until  they  reach  their  final  destination ;  the 
securities  founded  on  them  are  employed  to  pay  and  extinguish 
each  other  by  every  way  which  the  various  devices  of  the  credit 
system  offers.  The  most  effective  of  all  the  processes  of  the 
credit  system,  in  this  adjustment,  is  founded  on  the  fact  that,  to 
a  very  large  extent,  the  whole  body  of  creditors  are  also  debtors ; 
that  is,  the  holders  of  securities  received  in  the  course  of  busi 
ness  are  indebted  upon  securities  given  by  them  in  the  course  of 
business.  The  banks  furnish  in  their  notes,  by  their  deposit 
system,  and  upon  their  books,  in  modes  we  have  fully  explained, 
a  method  of  setting-off  or  fully  discharging  these  mutual  debts. 
Whatever  opinions  parties  may  form  of  each  other's  obligations, 
they  are  all  on  a  par  on  the  books  of  the  bank ;  the  securities 
are  there  all  equalized,  and  one  debt  is  made  as  good  as  another ; 
that  is,  the  deposits  are  equally  available,  however  different  the 
notes  discounted.  Every  debtor,  with  this  facility  afforded  him, 
can  pay  his  own  debts  with  the  debts  which  others  owe  him.  No 
currency  in  the  world  —  none  can  be  conceived  safer  and  better 
than  that  which  parties  mutually  indebted  thus  employ.  It  is 
paying  debts  with  debts ;  it  is  exchanging  credits  for  credits ; 
and  the  whole  proceeding  is  perfectly  voluntary.  Those  between 
whom  it  takes  place,  are  those  most  concerned ;  and  they  prefer 
this  to  any  other  mode  of  adjustment.  It  suits  those  not  imme 
diately  concerned,  because  these  mutual  debtors  are  the  holders 
of  the  chief  articles  of  consumption,  and  their  transactions  throw 
into  circulation  a  large  amount  of  bank  currency,  which  the 


CREDIT  SYSTEM  NOT  TO  BE  SUPPLANTED.  439 

people  at  large  receive  as  money,  and  employ  as  money,  not 
only  in  the  discharge  of  debts,  but  in  the  purchase  of  any 
required  article  of  consumption. 

This  is  what  is  constantly  going  on  in  Scotland,  in  England, 
and  in  the  United  States,  and  in  all  other  countries  of  active 
industry  and  trade,  where  commercial  confidence  and  personal 
integrity  exists  in  a  degree  sufiicient  to  warrant  it.  Men  who 
can  make  their  purchases  upon  credit,  can  never  be  induced  to 
keep  on  hand,  or  carry  gold  or  silver  to  pay  cash  down.  The 
interest  on  deferred  payments  is  the  same  as  the  interest  lost  by 
keeping  and  employing  coins.  The  substance  of  this  mode  of 
proceeding  is,  that  men  give  their  individual  paper  for  commodi 
ties  of  trade ;  this  individual  paper  is  converted  into  bank-notes, 
or  bank  deposits,  which  pass  into  circulation,  and  become  the 
very  means  or  currency  with  which  these  commodities  can  be 
purchased,  saving  the  use  of  money.  Gold  could  not  become  so 
plentiful  as  to  make  it  inexpedient  to  transact  business  in  this 
way.  The  risk,  trouble  and  expense  of  a  gold  currency  is  such, 
that  it  can  never  supplant  the  credit  system.  If  the  Bank  of 
England,  even  now,  were  permitted  to  issue  one-pound  notes, 
they  would  rapidly  take  the  place  of  sovereigns. 

What,  then,  is  the  ground  of  the  doubts  and  fears  above 
expressed?  When  the  "  borrowed  capital,"  the  "superficiality 
of  wealth,"  the  "  hollowness  of  apparent  riches,"  is  spoken  of, 
the  writer  forgets  that  the  paper  money  he  sees  in  circulation 
was  set  in  motion  by  some  value  of  labor,  or  its  products,  and 
that  there  is  an  actual  basis,  not  of  gold  and  silver,  but  of  some 
thing  more  needed,  under  that  paper.  When  the  man  who  holds 
a  cash  credit,  takes  from  the  bank  <£100,  and  purchases  commo 
dities  with  it,  those  commodities  are  the  basis  of  that  issue,  and 
they  will  sell  for  enough,  ordinarily,  to  redeem  the  notes,  or 
their  equivalent.  In  Scotland,  the  whole  of  the  annual  product 
of  industry  is  purchased  for  consumption  and  export  with  the 
notes  of  individuals,  convertible  into  bank-notes,  or  directly  with 
the  bank  currency  of  the  country ;  what  is  resold  in  Scotland, 
is  resold  for  that  currency ;  what  is  sent  abroad,  is  sold  for  what 
will  redeem  an  equivalent  in  that  currency.  There  is  no  borrow- 


440      THE    MECHANISM    OF    CREDIT    UNVEILED. 

ing  of  capital  in  this,  objectionable  in  theory  or  in  practice ;  on 
the  contrary,  it  is  a  mode  of  business  that  is  likely  to  prevail  in 
proportion  to  the  integrity,  intelligence  and  industry  of  the 
people.  There  is  nothing  superficial,  nothing  hollow  in  it.  Like 
other  good  things,  it  may  be  abused ;  but  what  is  right,  and 
what  is  abuse,  should  be  carefully  distinguished.  The  advan 
tages  of  this  system  are  so  great,  that  they  are  seized  upon,  to 
the  full  extent  they  are  accessible,  by  all  trading  people. 

This  writer  thinks  that  if  the  thick  veil  which  covers  the 
various  workings  of  the  complicated  mechanism  of  credit  were 
torn  away,  it  would  reveal  a  spectre  which  would  horrify  those 
who  look  no  deeper  than  the  surface  of  things.  Doubtless,  the 
rending  of  this  veil  would  display  some  things  which  would  hor 
rify  ;  but  it  would  also  reveal  the  power,  beauty  and  efficacy  of 
the  credit  system,  and  show  what  a  mighty  fabric  is  thus  built 
upon  human  confidence  and  commercial  honor ;  it  would  show 
that  the  losses  and  abuses  by  this  system  bear,  after  all,  a  very 
minute  proportion  to  the  vast  amount  of  transactions  effected  by 
its  means.  The  economy  of  the  credit  system  covers,  many 
times  over,  all  the  injuries  suffered.  The  great  effort  should  be, 
not  to  break  it  down,  but  to  prevent  its  abuses,  and  improve  its 
processes.  The  credit  system  will  be  as  solid  and  reliable  as 
anything  human  can  be,  when  properly  organized  and  protected. 
Nothing  in  Scotland  has  been  more  free  from  fluctuations,  no 
thing  connected  with  their  institutions,  political,  social  or^reli- 
gious,  has  been  more  firm,  in  every  aspect,  than  their  banking, 
the  chief  instrument  of  their  credit  system.  It  is  because  the 
working  of  the  mechanism  of  the  credit  system  is  not  seen,  that 
it  is  not  more  fully  confided  in  and  appreciated.  Its  operations 
are  so  vast,  that,  to  many  who  do  not  look  below  the  surface, 
they  appear  inflated  and  hollow,  because  they  cannot  conceive 
how  such  immense  sums  can  be  paid  without  money.  This  ap 
parent  inflation  and  hollowness  disappear,  when  it  is  considered 
that  it  is  nothing  else  than  making  commodities  pay  for  commo 
dities  —  enabling  men  to  use  their  credits  in  paying  their  debts. 
In  their  mutual  dealings,  men  may  have  transactions  to  any 
amount;  their  business  may  require  and  adjust  the  whole  on 


SCOTLAND    WILL    NOT    CHANGE    HER    SYSTEM.      441 

their  books  of  account :  these  dealings  might  be  regarded  as  im 
prudent,  if  all  had  to  be  paid  in  gold  or  silver :  their  transac 
tions  might  appear  inflated,  hollow  and  dangerous,  if  brought  to 
the  criterion  of  their  ability  to  pay  in  coin.  But,  in  the  simple 
mode  of  payment  they  adopt,  their  payments  are  as  good  as  gold 
or  silver  could  make  them.  There  is  no  good  reason,  then,  for 
the  allegation,  that  the  bank  currency  of  Scotland  is  only  a 
succedaneum  —  a  preliminary  step  in  the  progress  to  more  sub 
stantial  wealth.  The  time  can  never  come  when  Scotland  will 
introduce  a  gold  currency  in  place  of  paper,  on  account  of  her 
increased  wealth.  If  her  wealth  were  tenfold  what  it  is  now,  it  . 
would  still  be  the  best  mode  of  effecting  the  same  objects :  the* 
Scottish  people  have  now  tenfold  the  wealth  they  possessed  a 
century  ago,  yet  they  show  no  disposition  to  lay  aside  the  sim 
ple,  economical  and  sure  processes  of  their  banking  system.  It 
matters  not  to  what  low  rate  interest  may  fall,  in  the  future 
abundance  of  accumulated  means,  so  long  as  what  is  purchased 
must  be  paid  for,  so  long  as  men  give  mutual  credit  for  mutual 
convenience,  so  long  as  the  payments  of  trade  are  as  .now 
mainly  separated  from  the  movement  of  the  commodities,  so  long 
the  Scottish  men  of  business  will  find  it  for  their  advantage,  and 
for  the  benefit  of  the  whole  country,  to  avail  themselves  of  the 
facilities  furnished  by  their  banks,  and  of  the  working  of  the 
credit  system.  The  wealth  of  Scotland  is  now  as  secure  as 
that  ofrany  country ;  and  this  free  use  of  credit,  more  than  any 
other  thing,  has  contributed  to  this  result.  Its  advantages  will 
neither  be  overlooked  nor  surrendered  for  any  possible  use  of 
gold  or  silver  coins  —  articles  which  the  Scottish  people  will 
never  purchase  or  retain  largely,  simply  because  they  are  very 
expensive ;  and  they  have  learned  to  make  their  exchanges  of 
commodities  and  mutual  services  without  them. 


NOTE    TO    CHAPTER    XVI. 

REGULATIONS   FOR  EXCHANGE   OF   SCOTCH   BANKERS' 

NOTES. 

The  following  is  a  copy  of  the  regulations  of  the  banks  for  exchanging 
each  other's  notes,  dated  Edinburgh,  29th  June,  1835 :  — 

"  1.  The  exchange  shall  continue  to  be  settled  twice  a  week,  on  Tuesdays 
and  Fridays,  and  for  Glasgow  on  Wednesdays  and  Saturdays ;  the  notice 
and  amount  of  the  description  of  notes  held  to  be  given  by  the  respective 
banks  at  half-past  nine  o'clock,  A.  M.,  and  the  balances  to  be  paid  before 
one  o'clock  the  same  day. 

"  2.  The  payments  shall  be  made  in  Exchequer  bills,  Bank  of-  England 
notes  of  the  value  of  £100  or  upwards,  or  gold,  at  the  option  of  the  payer, 
it  being  understood  that  Bank  of  England  notes  shall  only  be  employed  to 
pay  the  fractional  parts  of  £1000. 

"  3.  The  Exchequer  bills  shall  be  filled  up  in  favor  of  the  bank  which 
may  be  the  original  holders,  and  shall  bear  the  distinguishing  mark  of 
"Edinburgh  Exchange  Bill,"  showing  that  they  belong  to  the  Edinburgh 
exchanges,  and  are  not  intended  to  be  used  for  any  other  purpose,  and  shall 
be  received  and  paid  at  par,  with  the  interest  that  may  be  due  when  the 
transfer  takes  place. 

"4.  The  amount  of  Exchequer  bills  to  be  kept  in  the  circle  is  fixed  at 
£400,000,  to  be  applied  as  follows:  — 

Bank  of  Scotland £63,000 

Koyal  Bank 62,000 

British  Linen  Co 50,000 

Sir  Wm.  Forbes  &  Co 50,000 

Commercial  Bank 50,000 

National  Bank 50,000 

Leith  Bank 15,000 

Glasgow  Union  Bank 35,000 

Western  Bank 25,000 

and  each  bank  so  to  arrange  their  transactions  as  to  maintain  their  quota 
in  the  circle  at  all  times. 

"  5.  The  Exchequer  bills  to  be  of  the  value  of  £1000  each. 

"  6.  The  amount  of  Exchequer  bills  held  by  each  bank  shall  be  stated 
every  exchange  day,  in  the  clearing-room. 

.  "7.  As  the  Exchequer  bills  may  be  expected  to  accumulate  with  some 
of  the  banks,  and  to  be  wanted  at  others,  it  shall  be  imperative  on  the  par 
ties  so  situated  to  sell  or  buy  Exchequer  bills ;  that  is  to  say,  the  party 
holding  the  greater  amount  of  Exchequer  bills  shall  be  bound  to  sell  to  the 
party  in  want  of  them  what  may  be  required  for  the  legitimate  purposes 
of  the  exchanges ;  but  it  shall  not  be  imperative  on  that  party  to  sell  a 
greater  amount  than  what  will  reduce  their  stock  to  the  original  quota. 

(442) 


NOTE    TO    CHAPTER    XVI.  443 

"  8.  Interest  shall  be  paid  for  eight  days,  equal  at  present  to  one  shil 
ling  per  cent,  upon  the  purchase  and  sale  of  Exchequer  bills  from  the 
banks,  by  a  draft  on  London  at  five  days'  date,  the  purchaser  also  paying 
the  stamp. 

"  9.  The  bills  put  in  circulation  are  to  be  nearly  of  the  same  date,  so  far 
as  is  consistent  with  these  regulations,  and  to  be  sent  up  for  exchange  be 
fore  due,  and  new  ones  are  to  be  provided,  of  a  later  day,  so  as  to  keep  up 
the  stock  in  the  circle,  and  no  advertised  bills  are  to  be  used  in  the  ex 
changes. 

"  10.  The  Exchequer  bills,  within  a  week  after  the  government  notice 
appears  in  the  Gazette,  are  to  be  given  up  to  the  original  holders,  upon 
receiving  other  bills,  not  advertised,  with  a  draft  on  London,  Bank  of  Eng 
land  notes,  or  gold,  at  the  option  of  the  holders  of  the  advertised  bills. 

"  11.  The  seventh  regulation  will  tend,  in  a  great  degree,  to  equalize  the 
amount  of  Exchequer  bills  among  the  different  banks ;  but  if  Exchequer 
bills  should  nevertheless  accumulate  in  the  hands  of  a  party,  so  as  to  ex 
ceed  their  original  quota  by  more  than  one-third,  they  shall  have  the  power 
to  call  upon  the  party  holding  the  smallest  amount  to  purchase  the  excess ; 
that  is  to  say,  the  excess  above  their  quota  plus  one-third.  But  it  shall  not 
be  imperative  on  any  party  to  take  more  than  is  required  to  bring  up  their 
stock  to  two-thirds  of  the  original  amount.  In  this  way  the  fluctuation  in 
the  amount  of  Exchequer  bills  among  the  different  banks,  which  is  an 
essential  part  of  this  arrangement,  need  never  permanently  exceed  one-third 
more  and  one-third  less  than  the  original  quota  of  each.  •  The  terms  of  pur 
chase  to  be  the  same  as  in  the  eighth  article. 

"  12.  The  exchanges  are  to  be  made  at  the  Bank  of  Scotland  and  Royal 
Bank  alternately,  who  reciprocally  undertake  to  pay  to  those  banks  who 
are  creditors  in  the  exchange  the  Exchequer  bills,  bills  of  exchange,  Bank 
of  England  notes,  or  gold,  received  from  those  banks  who  are  debtors  in 
the  exchange.  But  the  Bank  of  Scotland,  and  the  Royal  Bank,  shall  not, 
nor  shall  either  of  them,  be  in  any  way  responsible  for  the  exchange  trans 
actions  or  otherwise  soever. 

"  13.  The  statement  of  balances,  after  they,  are  struck,  to  be  sent  to  the 
respective  banks,  from  the  clearing-room,  by  their  clerks,  and  the  clerks 
of  the  bank  creditors  to  be  in  waiting  to  receive  the  amount  due  to  them 
at  12  o'clock.  The  British  Linen  Company  shall  send  to  the  Bank  of  Scot 
land  and  Royal  Bank  alternately  a  statement  of  their  exchange  transac 
tions,  signed  by  the  manager.  The  clerk  to  bring  over  Exchequer  bills, 
Bank  of  England  notes,  or  gold,  for  payment  of  any  balance  that  maybe 
due  by  them,  and  to  receive  Exchequer  bills,  Bank  of  England  notes,  or 
gold,  for  such  balances  as  may  be  due  to  them  on  the  day's  transactions. 

"  14.  Any  bank  party  to  this  agreement  to  have  the  power  of  withdraw 
ing  from  it,  and  receiving  back  their  Exchequer  bills  at  par,  upon  giving 
three  months'  notice."  —  Lawson's  History  of  Banking,  pp.  422-5. 


CHAPTER    XVII. 

THE  BAKES  OF  THE  UNITED  STATES. 

§  1.  Banks,  agencies  or  instruments  of  payment  —  Discussions  and  differ 
ence  of  views  —  Banks  are  dealers  in  credits —  General  waiver  of  payment 
in  specie  — Fund  for  payment  made  by  discounting  notes  —  Banks  absorb 
their  own  issues  —  Process  exemplified  —  The  demand  for  bank  currency 
makes  it  good  —  Commodities  of  trade  held  by  debtors  to  the  banks  —  Are 
sold  to  pay  the  banks  —  Bank  currency  the  medium —  The  commodities  the 
basis  ;  the  individual  and  bank  paper  mere  securities  and  means  of  adjust 
ment —  Circulation  and  deposits  of  New  York  banks  in  1857  —  Daily  pay 
ments —  Banks  of  the  United  States  —  Deposits,  their  agency —  The  banks 
pay  and  are  paid  in  their  own  currency,  and  by  this  furnish,  to  a  certain- 
extent,  a  safe  medium  for  circulation  —  Mutual  debts. 

THE  subject  of  banking  has  been  one  of  growing  interest  for 
several  centuries.  When  the  Bank  of  Venice  was  the  only  insti 
tution  of  the  kind  in  Europe,  it  was  little  known ;  its  operations 
as  an  institution  of  credit,  and  an  active  agent  in  the  payments 
of  commerce,  were  understood  by  few  out  of  the  republic.  The 
known  fact,  that  the  owners  of  the  public  debt  transferred  their 
claims  on  the  public,  in  whole  or  in  part,  at  pleasure,  did  not 
suggest  the  magnitude  of  the  commercial  payments  effected  at 
the  bank  by  these  transfers.  While  those  who  were  uninitiated 
regarded  these  transfers  at  the  bank  as  mere  changes  of  invest 
ment,  by  which  some  sold  and  others  purchased  portions  of  the 
public  debt  —  others  knew  that  the  fund  thus  transferred  was 
the  chief  medium  of  commercial  payments,  very  much  the  largest 
portion  of  which  were  thus  effected.  As  it  was  then,  so  it  is 
necessary  now,  to  look  deeper  than  the  mere  surface,  to  ascer 
tain  the  real  functions  of  banks.  To  very  many,  a  bank  is 
looked  upon  only  as  an  institution  enjoying,  by  charter,  the 
privilege  of  issuing  and  lending  bank-notes  as  a  currency. 

(444) 


CONFLICTINNG    OPINIONS.  445 

Nearly  all  the  discussions  upon  banking,  and  nearly  all  the 
legislation  upon  that  subject,  proceeds  from  this  point  of  view. 
And  what  subject  has  been  more  largely  discussed  in  the  United 
States  —  what  more  the  subject  of  legislation  than  banking  ? 

It  is  not  from  this  point  of  view  we  now  regard  this  topic. 
We  intend  merely  to  consider  banks  of  circulation  as  agencies 
of  payment.  In  their  exercise  of  that  agency,  the  bank-notes 
have  but  a  small  part.  In  the  aspect  just  mentioned,  in  which 
the  banks  have  been  generally  regarded,  there  are  few  subjects, 
the  discussion  of  which  has  elicited  wider  differences  of  opinion. 
Language  has  been  scarcely  adequate  to  express  the  bitterness 
of  opposition  and  dislike  towards  banks,  on  one  side,  and  the 
admiration  and  eulogy  of  them,  on  the  other.  This  discussion 
has  scarcely  paused,  in  this  country,  for  the  last  half  century. 
Our  legislative  halls,  during  that  period,  have  seldom  passed  a 
year  without  devoting  more  or  less  time  to  this  fruitful  theme. 
Every  order  of  talent  has  been  applied  to  it,  and  every  grade  of 
practical  knowledge  has  been  employed  upon  it.  That  know 
ledge  has  been  increased,  and  that  opinions  have  been  multi 
plied,  is  very  true ;  but  opinions  are  as  conflicting  as  ever,  and 
the  main  questions  remain  unsolved.  Opposers  of  banks  are 
found  of  every  grade,  from  the  mildest  objectors  to  those  who 
would  banish  every  bank  from  the  country,  and  allow  no  cur 
rency  but  gold  or  silver :  and  friends  of  banks,  from  those  who 
think  that  the  banks  might  be  legislated  into  some  shape  or  con 
dition  in  which  they  would  be  endurable,  to  those  who  would 
make  banking  as  free  as  farming  or  shoemaking.  These  parties 
view  the  subject  from  different  points,  and  of  course,  never 
having  the  same  facts  before  them,  can  never  reach  the  same 
conclusions.  But,  as  not  unfrequently  happens  in  such  cases, 
there  is  much  that  is  correct  in  the  views  of  both. 

We  shall  attempt  neither  to  reconcile  these  opinions,  nor  to 
weigh  the  arguments  of  either  party :  but  endeavor  to  show  what 
the  banks  do,  and  how  they  do  it.  If  we  could  do  this  as  it 
should  be  done,  it  would  not  be  difficult  to  find  ample  justifica 
tion  for  the  opposing  opinions  to  which  we  have  adverted.  The 
banks  of  the  United  States  are,  properly  speaking,  dealers  in 


446  BANKS    ARE    DEALERS    IN    CREDIT. 

credit.  So  far  as  their  capital  is  paid  up  in  gold  or  silver,  it  is 
reserved  as  a  security  for  their  circulation.  It  is  a  rare  thing 
that  a  bank  lends  gold  or  silver.  Their  business  consists  mainly 
in  purchasing  commercial  paper  —  that  is,  the  evidences  of  debt 
taken  by  men  of  business  in  the  ordinary  course  of  their  affairs ; 
in  paying  for  that  paper  with  bank-notes,  or  with  credits  granted 
upon  their  books ;  in  receiving  upon  deposit  their  own  notes, 
and  claims  or  transfers  upon  other  banks ;  in  allowing  a  con 
stant  transfer  of  deposits,  in  the  way  of  payment,  among  their 
customers  and  those  with  whom  they  deal.  The  banks,  then, 
are  not  lenders  of  money,  though  compelled  to  pay  their  obli 
gations  in  money.  They  are  founded  on  the  idea  that  an  asso 
ciation  of  men,  with  a  paid-up  capital,  and  a  corporate  existence, 
is  entitled  to  a  higher  credit  than  individuals  ;  and  that  the  latter 
might  find  it  greatly  for  their  advantage,  to  avail  themselves,  in 
their  business  transactions,  of  this  superior  credit. 

We  have  seen  that  the  credit  system  rests  upon  the  fact, 
that  the  business  of  purchasing  and  selling  commodities  is  sepa 
rated  from  the  business  of  payments  ;  and  upon  the  further  fact, 
that  the  commodities  which  men  sell  are  made  to  pay  for  those 
they  purchase.  So  far  as  credits  and  payments  are  concerned, 
it  is  a  main  object  of  every  man  to  apply  his  credits  to  pay  his 
debts ;  to  employ  what  is  due  to  him  by  others  in  discharging 
that  which  he  owes  to  others.  The  main  agency  in  this  is  the 
banks.  It  is  well  known  that  all  the  large  transactions  of  busi 
ness  are  made  upon  the  credit  of  the  parties  concerned  in  them ; 
that  the  great  staples  of  the  country,  as  well  as  foreign  goods  in 
large  quantities,  are  bought  and  sold  upon  individual  credit. 
The  market  value  involved  in  every  transaction  is  expressed  in 
money  of  account,  and  appears  on  the  face  of  the  bills  of  ex 
change  and  promissory  notes  which  the  purchaser  gives,  and  the 
seller  takes,  as  evidence  of  the  debt  incurred  and  credit  given  in 
each  case.  These  evidences  of  debt  and  credit,  which  represent, 
in  various  shapes,  the  market  value  of  the  commodities,  foreign 
and  domestic,  as  they  move  in  the  channels  of  trade,  are  the 
very  articles  in  which  it  is  the  object  and  proper  business  of  the 
banks  to  deal.  The  parties  to  these  evidences  of  debt,  or  this 


WAIVER    OF    PAYMENT    IN    COINS.  447 

commercial  paper,  having  delivered  and  received  the  commodi 
ties  upon  which  the  credits  and  indebtedness  are  alike  founded, 
have  the  remaining  duty  of  payment  to  fulfil. 

By  the  laws  of  the  United  States,  every  such  creditor  has  the 
right  to  demand  payment  in  gold  or  silver ;  and  no  State  can, 
by  the  terms  of  the  constitution,  take  away  this  right.  But  this 
right  is  waived  in  business  to  such  an  extent,  that,  out  of  the 
retail  trade,  not  one  per  cent,  of  the  payments  are  exacted  or 
made  in  gold  or  silver  coin.  The  reason  is  obvious  and  simple. 
Men  extensively  engaged  in  commercial  and  industrial  pursuits 
are,  by  the  very  nature  of  their  business,  both  buyers  and 
sellers  —  both  debtors  and  creditors.  It  is  important  to  pay 
their  debts,  and  realize  their  credits,  with  the  least  trouble,  ex 
pense  and  waste  of  time  possible.  When  any  two  of  them  have 
mutual  accounts  against  each  other  on  their  books,  they  compare 
and  balance  them  :  of  course  debts  so  paid,  and  credits  so  real 
ized,  are  as  satisfactorily  paid  and  realized  as  if  gold  had  passed 
on  each  transaction.  So  each  man  of  business  indebted  upon 
promissory  notes  and  bills  of  exchange,  and  holding  such  paper 
of  others  for  debts  due  to  him,  is  only  desirous  of  applying  his 
credits  to  his  debts.  He  never  thinks  of  looking  for  gold  or 
stiver  to  effect  a  discharge  of  his  debts,  and  as  little  does  he 
think  of  exacting  such  payment  from  those  who  are  indebted  to 
him.  This  mode  of  payment  is  at  once  inconvenient,  hazardous, 
expensive,  and,  if  attempted  by  only  one-tenth  of  the  debtors, 
would  be  impossible.  It  does  not  enter,  therefore,  into  the  thoughts 
of  business  men ;  they  perfectly  understand  the  proper  sphere 
of  coins  and  bullion,  and  know  that  they  are  necessary  only  in 
the  retail  trade,  and  in  payment  of  national  or  territorial 
balances.  Nothing  is  better  settled  and  acquiesced  in,  than  this 
universal  waiver  of  payment  in  the  precious  metals.  No  sane 
man  of  business  is  willing  to  exact  that  with  which  his  debtors 
cannot  possibly  comply,  and  that  with  which  it  would  be  equally 
impossible  for  him  to  comply,  if  it  were  exacted  of  him.  Debts, 
then,  though  all  payable  in  lawful  money  of  the  United  States, 
are  very  seldom  so  paid,  because  they  cannot  be  so  paid,  and  if 
they  could,  they  would  not  be  so  paid.  It  is  every  way  more 


448  BANKS    ARE    AGENCIES    OF    PAYMENT. 

advantageous  for  men  to  apply  their  credits  to  the  payment  of 
their  debts,  and  that  is  what  constitutes  the  crowning  process 
of  the  credit  system. 

The  banks  of  the  United  States  are  the  chief  agencies  in  this 
mode  of  payment.  They  offer  the  means  and  facilities  of  pay 
ment  which  the  parties  to  this  business-paper  require.  They 
receive  this  paper,  having  some  months  to  run  to  maturity,  and 
deducting  interest  for  the  time,  give  the  parties  bank-notes,  or  a 
credit  on  their  books  for  the  proceeds.  This  is  not  turning 
individual  notes  into  money,  it  is  simply  turning  them  into  pro 
missory  notes  of  the  bank,  or  deposits ;  these  being  of  higher 
credit,  and  fitted,  from  the  manner  in  which  they  are  issued,  to 
be  used  as  a  currency  or  a  medium  of  payment.  The  real  basis 
of  the  individual  notes  discounted  by  the  bank  is  the  commodi 
ties  which  the  persons  giving  the  notes  received.  These  per 
sons  contracted  debts  to  the  several  amounts  of  their  notes,  and 
against  these  debts  they  hold  the  purchased  commodities.  They 
oifer  the  goods  thus  purchased  to  the  public,  and  expect,  from 
their  sale,  to  realize  the  means  of  paying  the  debts.  The  dis 
counted  paper,  therefore,  exhibits  on  its  face  the  true  mar 
ket  value  of  the  commodities  purchased  by  it ;  and  the  bank 
notes,  or  bank  credits,  given  for  this  individual  paper  have  the 
same  basis,  with  the  added  guarantee  of  the  bank.  All  bank 
notes  and  bank  credits  issued  upon  real  business-paper  are  vir 
tually  issued  for  commodities  actually  moving  in  the  regular 
channels  of  trade.  The  purchasers  of  these  commodities  expect 
to  realize  enough,  by  their  sale,  not  only  to  pay  for  them,  but  a 
profit  beside. 

It  is  this  process  which  is  continually  absorbing  bank-notes, 
and  returning  them  to  the  banks.  The  sellers  of  goods  receive 
the  paper  of  the  purchasers,  and  dispose  of  it  to  the  banks, 
taking  therefor  bank-notes  and  bank  credits,  the  latter  of  which 
they  employ  in  paying  their  debts,  and  the  former  pass  into 
circulation  in  the  retail  business,  and  in  this  way  soon  reach  the 
hands  of  the  debtors  of  the  banks,  to  whom  they  are  always  as 
valuable  as  the  equivalent,  or  same  nominal  amount  of  gold  or 
silver,  and  even  more  desirable,  because  they  pay  debts  to  the 


EXEMPLIFICATION.  449 

bank  equally  well,  and  with  less  trouble,  expense  and  hazard. 
The  debtors  of  the  banks  are,  then,  the  special  holders  of  the 
commodities,  upon  the  sale  of  which  their  debts  are  founded ; 
and  they  offer  these  same  goods  to  the  public  for  the  same 
amount  of  bank-notes  to  which  their  sale  gave  origin :  these 
goods  should  be  adequate  to  redeem  the  bank-notes,  or  to  bring 
as  much  money  as  will  redeem  them.  A  dealer  who  purchases 
from  a  miller  1000  barrels  of  flour,  at  $4.50,  gives  his  note  at 
three  months  for  $4500 ;  the  miller  carries  this  note  to  bank, 
and  receives  for  it  the  promissory  notes  of  the  bank  to  the 
amount  of  $4430 ;  if  the  dealer  sells  his  flour  at  half  a  dollar 
per  barrel  profit,  he  will  receive  $5000,  enough  to  pay  the  bank, 
and  leave  a  profit  for  himself.  He  can  have  no  better  currency 
in  which  to  pay  the  bank  than  its  own  notes,  aud  the  bank  can 
do  no  better  than  to  receive  payment  in  its  own  obligations. 
The  people  who  consume  flour  need  to  look  no  further  for  a  cur 
rency  good  enough  to  buy  flour,  than  these  promissory  notes  of 
the  bank;  for  they  are  as  readily  received  by  the  dealer  in 
flour,  as  coins  'of  gold  or  silver.  What  is  true  of  flour,  applies 
to  every  other  article  of  general  consumption.  The  business  of 
the  banks  and  their  customers  embraces  the  whole  round  of  the 
articles  of  trade,  and  of  the  products  of  industry. 

Let  us  suppose,  for  the  purpose  of  illustration,  that  the  dealer 
in  flour,  instead  of  giving  his  note  for  $4500  at  three  months, 
gives  900  promissory  notes  drawn  by  himself,  payable  in  three 
months,  each  for  $5 ;  that  the  credit  of  the  dealer,  together  with 
the  endorsement  of  the  miller,  is  sufficient  to  give  these  small 
notes  free  currency ;  that  the  miller  pays  them  out  to  the 
farmers  for  wheat,  and  that  "these  pay  them  to  the  mechanics, 
manufacturers  and  merchants  with  whom  they  deal ;  and  that, 
finally,  these  classes  pay  them  to  the  dealer  for  flour,  an  article 
of  necessity  for  all.  The  dealer  in  flour  can  receive  no  better 
currency  than  his  own  notes  for  the  amount  of  his  debt.  His 
profit  of  $500  will  be  realized  in  money,  or  in  something  equally 
satisfactory.  The  cases  above  supposed  are  similar  in  sub 
stance,  the  difference  being  that,  in  the  first  case,  the  bank 
29 


450  HOW    CURRENCY    IS    MADE. 

issues  the  small  notes,  and  in  the  latter,  the  drawer  of  the  note 
for  which  the  bank  exchanges  its  issues. 

We  may  employ  the  same  parties  for  a  further  illustration. 
Suppose  the  dealer  in  flour,  after  giving  his  note  in  September 
at  three  months,  for  $4500,  sells  the  flour  to  several  parties  in 
October,  and  receives  their  several  notes  at  three  months,  for 
$2500,  $1500,  and  for  $1000.  These  notes,  maturing  a  month 
later  than  the  note  for  $4500,  are  not  applicable  to  its  pay 
ment,  and  without  some  special  device  or  facility,  afford  no  help 
towards  that  payment ;  but  the  bank  furnishes  the  device  and 
the  facility.  The  bank  holds  the  note  for  $4500,  payable  in 
December,  and  application  being  made,  it  discounts  the  three 
notes  at  the  instance  of  the  dealer  in  flour,  and  gives  him  credit 
on  its  books  for  the  proceeds.  Upon  these  proceeds  standing  to 
his  credit,  under  the  name  of  deposits,  the  flour  dealer  gives  his 
check,  in  December,  for  $4500,  and  retires  his  note. 

If  the  banks  in  any  community  have  discounted  notes  to  the 
amount  of  a  million,  averaging  sixty  days  to  maturity,  granting 
therefor  credits  to  the  amount  of  $990,000,  they  will  promptly 
give  up  any  or  all  the  notes  going  to  make  up  the  million,  for  a 
return  of  their  credits  to  the  amount.  The  banks  give  nothing  for 
the  notes  discounted  but  credits  on  their  books :  what  they  gave 
for  the  notes  they  are  willing  to  receive  in  kind  for  them.  The 
profits  of  the  bank,  being  the  interest,  for  which  they  issued  no 
credits,  must  of  course  be  paid  when  the  notes  are  retired.  The 
main  business  of  the  banks  consists,  then,  in  purchasing  commer- 
•cial  securities  and  evidences  of  debt,  paying  for  them  with  their 
own  notes  and  bank  credits,  and  deducting  the  interest  for  their 
profit.  In  doing  this,  they  not  only  furnish  a  medium  of  pay 
ment  in  which  these  commercial  securities  can  be  discharged,  but 
a  currency  which  may  be  employed  in  the  interval,  before  it  is 
applied  to  the  extinction  of  these  debts.  What  chiefly  makes 
this  currency  available  and  effective  is,  that  there  is  an  active 
and  urgent  demand  for  it,  to  the  whole  amount  due  to  the 
banks ;  that  is,  for  more  than  all  the  banks  have  issued.  This 
demand  is  active,  urgent,  daily,  unremitting :  the  notes  in  bank 
are  maturing  daily,  and  the  demand,  therefore,  never  flags : 


HOW    CURRENCY    IS    ABSORBED.  451 

every  day  has  its  payments,  which  are  to  be  effected  with  money 
or  the  issues  of  the  banks.  The  latter,  in  any  community  where 
there  are  banks  of  circulation,  being  the  chief  medium  of  pay 
ment,  is  the  medium  most  in  demand. 

We  have  shown  that,  in  all  cases  where  the  notes  discounted 
by  the  banks  were  given  by  the  makers  of  them  for  commodities 
of  daily  use  and  consumption,  these  commodities  are  imme 
diately  offered  to  the  public  for  bank-notes,  or  checks  on  bank 
deposits,  as  the  proper  fund  with  which  to  pay  the  discounted 
notes.  The  commodities,  by  their  sale,  give  origin  to  promis 
sory  notes ;  the  promissory  notes  give  rise  to  the  bank-notes 
and  credits ;  these  become,  in  their  turn,  a  medium  with  which 
to  purchase  the  commodities ;  and  the  bank-notes  and  bank 
credits  coming  thus,  by  circulation,  into  the  hands  of  the  debtors 
to  the  banks,  are  returned  to  the  banks  in  payment  of  the  dis 
counted  notes.  This  is  a  very  simple  and  sound  process  of  pay 
ment  ;  the  discounted  notes  are  founded  on  the  market  value  of 
actual  commodities,  and  of  course  the  same  basis  is  beneath  the 
bank-notes  and  bank  credits ;  and  the  purchaser  finally  pays 
his  debt  by  the  sale  of  the  commodities  on  account  of  which  his 
liability  was  incurred.  If  a  dealer  issues  1000  five-dollar  notes 
drawn  by  himself,  for  1100  barrels  of  flour,  and  sells  the  flour 
for  $5  a  barrel,  his  own  notes  will  make  a  good  medium  of  pay 
ment,  to  the  extent  of  1000  barrels.  The  remaining  100  barrels 
are  his  profit,  and  must  be  paid  for  in  money,  or  what  is  equally 
satisfactory.  The  transaction  is  the  same,  in  substance,  when 
the  bank  intervenes ;  the  bank  issues  the  small  notes,  or  credits, 
and  becomes  the  owner  of  the  note  given  by  the  dealer.  The 
latter  sells  the  flour,  and  thus  obtains  the  notes  of  the  bank, 
with  which  he  pays  his  own. 

This  process,  or  what  is  substantially  the  same,  is  the  basis 
of  a  large  proportion  of  the  real  business  between  the  banks, 
their  customers  and  the  public.  There  are  other  processes  by 
which  payments  are  effected  through  the  banks,  equally  legiti 
mate  and  economical,  some  of  which  may  not  be  equally  safe  for 
the  public.  Let  us  suppose  that  a  miller  sells  to  a  dealer  1000 
barrels  of  flour  for  $5000  ;  that  the  latter  sells  the  same  flour  to 


452  EXEMPLIFICATIONS. 

another  dealer  for  $5250,  and  he  to  another  for  $5500 ;  and 
that  it  is  retailed  by  the  latter  at  $6,  or  for  a  total  of  $6000  : 
in  this  case,  three  promissory  notes  are  issued,  respectively  for 
$5000,  $5250,  and  for  $5500,  making,  in  all,  $15,750  of  whole 
sale  transactions,  besides  the  amount  for  which  the  flour  was 
retailed,  $6000.  If  these  three  notes,  having  an  average  of 
sixty  days  to  run,  were  all  discounted,  bank-notes  and  bank 
credits  to  the  amount  of  $15,593  would  be  issued  on  the 
basis  of  the  1000  barrels  of  flour.  This,  at  first  glance,  may 
appear  to  be  an  over-issue.  But  each  of  these  persons  who 
parted  with  that  quantity  of  flour  for  a  mere  promise  to  pay, 
must  have  deemed  the  purchaser  to  be  good,  and  his  promise 
reliable,  and  so  must  the  bank  which  discounted  the  notes.  Two 
parties  besides  the  bank,  deeply  interested  in  being  right  and 
cautious,  have  adjudged  these  notes  to  be  good.  The  process  of 
payment  is  simple.  The  bank  has  issued  notes  or  credits  to  the 
amount  of  $15,593,  and  holds  three  notes,  amounting  together 
to  $15,750  ;  the  makers  of  these  three  notes  must  either  return 
an  equivalent  in  the  issues  of  the  bank,  or  the  money.  The 
debtor  of  the  note  for  $5000  has  the  proceeds  of  his  sale  for 
$5250  to  his  credit,  and  with  this  he  pays  and  takes  up  his 
note :  so,  also,  the  debtor  of  the  $5250  has  the  proceeds  of  his 
sale  for  $5500  at  his  credit,  and  with  this  he  retires  his  note : 
and,  finally,  the  debtor  of  the  note  of  $5500  gathers  up  the  pro 
ceeds  of  sales  at  retail,  in  the  shape  of  bank-notes  or  credits, 
and  pays  off  the  note  remaining  in  the  bank  for  $5500.  Thus 
these  notes  provide  the  medium  by  which  they  may  all  be  paid, 
for  every  note  implies  a  debtor  of  sufficient  credit  to  purchase 
property  on  the  faith  of  his  simple  promise  to  pay ;  and  every 
discount  by  a  bank  implies  a  confidence  of  the  bank  that  the 
drawer  or  acceptor  of  the  paper  had  ability  to  redeem  the  issues 
of  the  bank  to  the  amount,  or  pay  in  money. 

In  cases  where  banks  discount  paper  not  given  for  property 
transferred  at  the  time,  it  is,  or  should  be,  on  well-grounded 
confidence  that  the  maker  of  the  paper  has  the  power  or  means 
of  redeeming  from  the  hands  of  the  public  an  equal  amount  of 
the  issues  of  the  bank.  The  banks  being  large  holders  of  indi- 


DAILY    PAYMENTS     OF    NEW    YORK.  453 

vidual  paper,  either  discounted  or  deposited  with  them  for  col 
lection,  they  are  of  course  constantly  looked  to  for  the  means  of 
payment ;  and  a  credit  on  the  books  of  a  bank,  granted  by  the 
bank,  or  derived  from  another  quarter,  being  all  that  is  required, 
it  is  earnestly  sought  for  that  purpose.  Where  there  are  many 
banks,  and  large  transactions  in  business  and  upon  credit,  the 
movement  of  these  payments  in  banks,  and  the  consequent 
movement  of  bank  credits  or  deposits,  become  far  too  compli 
cated  to  be  followed  up  by  any  process  of  analysis.  One  great 
feature,  however,  must  ever  be  prominent,  and  that  the  most 
effective  of  all  in  sustaining  the  present  banking  system ;  that 
is,  that  every  debtor  of  a  bank  is  an  active  agent  in  purchasing 
and  returning  to  the  bank  its  notes  and  credits ;  that  the  issues 
of  the  banks,  wrhether  notes  or  credits  on  their  books,  are  more 
available,  convenient  and  economical  for  these  debtors,  than  the 
legal  currency  of  coins.  They  are  more  abundant,  more  easily 
obtained,  and  equally  effective.  It  is  this  which  gives  to  bank 
notes  and  bank  credits  their  efficiency  and  rapidity  of  move 
ment.  The  amount  of  the  circulation  of  the  New  York  banks 
averaged  over  $8,000,000  in  1857,  and  the  deposits  averaged 
over  $87,000,000.  These  constitute  the  medium  in  which  the 
payments  of  the  City  of  New  York  are  chiefly  made.  With 
these,  there  is  a  daily  payment  to  be  made  of  from  $30,000,000 
to  $50,000,000,  and  they  are  quite  capable  of  making  that 
amount  of  payments  each  day,  for  both  notes  and  deposits  may 
be  paid  many  times  during  the  day.  It  is  very  safe  to  assume 
that  over  $30,000,000  of  city  bank-notes  and  deposits  are  paid 
each  business  day  in  New  York.  There  is  a  demand,  then,  upon 
these  notes  and  deposits  in  every  week,  for  payments,  to  the 
amount  of  $200,000,000,  and  in  every  month  for  $800,000,000. 
This  demand  daily,  weekly,  monthly,  constantly  pressing  upon 
a  fund  of  bank-notes  and  deposits,  which  may  at  no  time  exceed 
$100,000,000,  is  certainly  active  and  pressing  enough  to  keep 
up  the  value  of  a  fund  so  much  used,  and  so  indispensable  to  the 
men  who  have  $200,000,000  to  pay  every  week. 

That  these  sums  are  far  within  the  actual  daily  payments  of 
New  York  is   apparent  from  the  operations  of  the  Clearing- 


454  NEW    YORK   BANKS. 

house.  The  amount  cleared  daily,  in  1857,  was  over  $20,000,000, 
and  these  clearings  are  but  the  balances  on  the  transactions 
between  the  banks.  A  vast  sum  of  payments  is  made  every  day 
in  the  business  of  such  a  city  as  New  York,  which  is  in  no  way 
embraced  in  the  transactions  of  the  Clearing-house.  If  we 
assume  that  the  whole  of  the  payments  effected  yearly  through 
the  agency  of  banks  in  the  United  States,  is  only  ten  times 
greater  than  the  amount  paid  yearly  in  New  York,  we  shall 
have  an  aggregate  400  times  greater  than  the  amount  of  the 
precious  metals  in  the  country ;  500  times  the  amount  of  the 
bank-note  circulation  of  the  United  States ;  400  times  the 
amount  of  the  bank  deposits ;  and  SO  times  the  annual  value  of 
the  whole  productive  industry  of  the  country.1  These  estimates 
fall  far  short  of  the  whole  of  the  payments  made  in  the  country; 
for  all  payments  made  out  of  bank  are  expressly  excluded,  as 
well  as  all  the  transactions  of  the  retail  trade.  In  all  this  great 
adjustment  of  debt  and  credit,  the  office  of  the  precious  metals 
is  that  of  payment,  when  adjustment  fails.  Where  two  banks 
have  claims  against  each  other,  to  the  amount  of  hundreds  of 
thousands,  they  only  pay  the  balance  in  money :  so  between  two 
cities,  it  is  only  the  balance  upon  their  mutual  indebtedness  that 
is  paid  in  money  :  it  is  the  same  between  two  states  or  countries. 
The  functions  of  the  precious  metals,  then,  in  this  great  work 
of  payment,  is  to  pay  balances,  and  to  perform,  as  may  be  re 
quired,  the  office  of  a  medium  of  exchange  in  the  retail  trade. 

The  great  fund  employed  in  this  adjustment  is  created  out  of 
the  promissory  notes  and  bills  of  exchange  given  in  the  regular 
course  of  domestic  commerce.  In  a  statement  of  the  condition 
of  the  banks  of  the  United  States  for  the  year  1856,  the  dis 
counts  and  loans  are  put  down  at  $084,000,000.  If  these  run 
off  four  times  each  year,  it  would  make  $2,736,000,000.  These 
loans  and  discounts  take  the  shape  partly  of  deposits,  and  partly 

1  If  the  operations  of  the  Clearing-house  in  New  York  were  taken  as  an 
indication  of  the  trade  of  the  city,  these  figures  would  be  increased.  We 
suppose  the  amounts  cleared  daily  in*  New  York  to  be  considerably  swelled 
by  the  stock  transactions  which  pass  through  the  banks  j  and  we  make 
allowances  accordingly. 


THE  FUND  USED  FOR  PAYMENTS.       455 

of  bank-notes  ;  both  of  which  are  being  constantly  extinguished 
and  redeemed  by  being  returned  to  the  bank  in  payment,  at  the 
rate  of  from  nine  to  ten  millions  daily.  But  the  fund  thus  con 
stituted  by  the  discounted  paper  of  men  in  business  is  that  which, 
by  its  transfer  and  circulation  in  the  form  of  bank  credits  and 
bank-notes,  effects  the  vast  aggregate  of  payments  we  have 
noticed.  The  banks  of  the  United  States  held,  on  the  average, 
in  the  year  1856,  the  sum  of  $684,000,000;  this  amount  would 
run  off  in  ninety  days,  absorbing  a  proportionate  amount  every 
day  of  bank  liabilities.  But  as  this  paper  is  discounted  upon 
an  average  time  of  ninety  days,  the  credits  granted  by  the  bank 
are  applicable,  during  that  time,  to  other  service,  and  are  used 
to  effect  a  much  larger  amount  of  payments  than  is  involved  in 
lifting  the  securities  discounted  by  the  banks. 

This  fund,  then,  is  subject  to  an  additional  demand  beyond  that 
which  arises  from  the  payment  of  nine  or  ten  millions  daily,  in 
retiring  the  discounted  paper  —  a  demand  of  scarcely  less  than 
$300,000,000  daily.  The  indebtedness  which  produces  this 
demand  arises  in  many  ways  beside  the  sale  of  commodities,  a 
very  considerable  proportion  being  the  mere  result  of  dealing  in 
credit.  Large  amounts  of  bank  credits  and  bank-notes  are  con 
stantly  lent  by  the  holders,  and  notes  of  individuals  taken 
therefor.  Large  transactions  in  stocks  are  continually  occur 
ring,  giving  occasion  to  notes  and  discounts.  Although  the  sum 
of  liabilities  thus  incurred  is  far  beyond  the  amount  of  the  dis 
counts,  a  rapid  movement  of  the  deposits  makes  it  practicable 
to  effect  payments  every  day,  at  least  thirty  times  the  amount 
required  to  discharge  the  discounted  paper.  The  additional 
employment  thus  given  to  this  fund,  causing  a  demand  for  it 
every  day  nearly  equal  to  its  whole  volume,  keeps  it  at  a  value, 
for  the  purposes  of  payment,  fully  equal  to  the  precious  metals. 
It  is  observable  that,  when  interest  is  at  six,  twelve  or  eighteen 
per  cent,  per  annum,  there  is  no  increased  price  of  the  precious 
metals.  When  the  price  of  this  fund,  which  is  that  employed 
in  the  payment  of  debts,  has  risen  three  hundred  per  cent.,  gold 
and  silver  have  not,  as  commodities,  advanced  at  all.  As  a 
matter  of  fact,  however,  they  are  not  the  medium  in  which  debts 


456  LEGAL    TENDER. 

are  paid,  and  therefore  they  do  not  increase  in  price  under  the 
most  urgent  demand  for  that  medium  or  fund  in  which  debts  are 
usually  paid. 

The  fund  employed  to  effect  the  payment  of  these  great  sums 
is  mainly  that  which  is  called  deposits  in  the  banks.  For,  how 
ever  great  the  amount  of  payments  effected  by  the  circulation 
of  bank-notes,  it  enters  into  our  present  estimate  only  to  the 
amount  of  the  bank-notes  daily  paid  out  and  received  at  the 
counters  of  the  banks.  The  payments  by  circulation  of  bank 
notes  are,  therefore,  left  out  in  our  approximation.  The  depo 
sits  are  the  chief  agent  in  the  work.  They  consist  in  credits 
given  by  the  banks  to  those  who  have  had  notes  or  bills  dis 
counted  :  the  b.anks  become  the  purchasers  and  holders  of  this 
individual  paper,  and  grant  these  credits  in  their  place.  Accord 
ing  to  returns  of  1856,  the  banks  of  the  United  States  had 
placed  to  the  credit  of  their  customers,  in  this  way,  $230,000,000, 
this  being  the  average  of  the  whole  year.  If  this  amount 
of  deposits  was  moved  200  times  in  the  year,  it  would  pay 
$46,000,000,000.  In  many  of  the  large  cities,  the  deposits  are, 
on  the  average,  moved  once  each  day. 

We  thus  see  that  the  credits  of  business  and  trade  furnish, 
by  the  intervention  of  the  banks,  the  very  fund  out  of  which 
the  corresponding  debts  are  paid.  These  debts  are,  in  no  pro 
per  sense  of  the  word,  paid  in  money :  they  are,  it  is  true,  pay 
able  in  lawful  money  of  the  United  States.  Every  creditor  has 
a  right  to  payment  in  gold  or  silver ;  and  if  debts  be  not  so 
paid,  it  is  because  the  creditor,  whether  bank  or  individual,  is 
equally  satisfied  with  some  other  mode.  The  legal  right  which 
every  man  has  to  demand  payment  of  what  is  due  to  him  in  the 
precious  metals,  has  no  doubt  a  powerful  effect  in  keeping  other 
currencies  up  to  the  price  of  the  precious  metals.  The  law  of 
legal  tender,  therefore,  though  of  little  practical  application  in 
the  business  of  payments,  exercises  a  beneficial  and  sustaining 
power,  the  benefits  of  which  it  would  be  difficult  to  estimate. 
When  every  creditor  can  exact  payment  from  his  debtor  in  gold 
or  silver,  it  may  be  presumed  he  is  satisfied  with  what  he 
accepts  instead;  and  no  currency,  in  such  circumstances,  can 


WHY    BANK    CURRENCY    IS    EFFICIENT.        457 

remain  long  below  its  proper  equivalent  in  coins,  without 
being  quoted  and  paid  at  a  discount.  Let  it  not  be  supposed, 
however,  that  the  law  of  legal  tender  is  the  only,  or  even  the 
chief,  power  which  maintains  the  value  of  the  great  fund  we 
have  pointed  out  as  the  medium  in  which  debts  are  chiefly  paid. 
The  main  reason  why  this  fund  maintains  its  value  is,  that  it  is 
receivable  in  discharge  of  all  debts  payable  at  the  banks ;  and 
being  receivable  by  the  banks,  it  is  of  course  receivable  by  all 
the  debtors  of  the  banks,  who  will  sell  any  article  they  have  for 
this  currency  as  readily  as  for  money.  The  indebtedness  to  the 
banks  is  so  great,  the  daily  demand  for  this  currency  is  so  press 
ing,  that  it  will  purchase  any  commodity  of  trade,  any  product 
of  industry,  and  pay  wages  or  personal  services  equally  as  well, 
and  with  far  more  convenience,  than  any  possible  use  of  coins. 
It  is,  therefore,  so  far  as  it  is  employed,  to  all  intents,  as  good 
and  as  effective  as  coin.  Those  who  take  it  have  their  choice 
between  currency  and  coin. 

We  have  stated  that  this  medium  of  payment  created  by  the 
banks  is  as  effective  as  gold  or  silver,  because  it  is  receivable  for 
debts,  and  because  it  will  purchase  anything  that  gold  or  silver 
can  purchase,  and,  it  may  be  added,  on  as  good  terms.  We 
have  already  explained  why  and  how  the  banks  can  so  receive  it 
from  year  to  year.  If  the  banks  have  a  special  advantage  in 
issuing  this  currency,  the  people  enjoy  an  equal  'benefit  in 
restoring  it  to  them  in  payment  of  debts.  The  advantage  of  the 
banks  in  the  business  is  too  great  to  make  it  supposable  they 
will  ever  voluntarily  abandon  it.  They  purchase  with  merely  a 
credit  on  their  books,  or  the  issue  of  their  paper,  the  very  best 
and  safest  individual  promissory  notes  which  are  made  in  busi 
ness,  and  on  these  they  have  an  ample  profit.  This  power  of 
purchasing  individual  paper  with  their  own  currency  would  cease 
if  their  customers  did  not  enjoy  the  reciprocal  favor  of  paying 
debts  in  the  same  medium. 

If  the  amount  of  discounts  and  loans  in  1856,  reported  at 
$684,000,000,  were  placed  to  the  credit  of  100,000  persons,  it 
would  be  found  that  these  persons  were  mutually  indebted  to 
within  ten  per  cent,  or  perhaps  less,  of  the  whole  amount.  The 


458  MUTUAL    INDEBTEDNESS. 

banks  might  enter  up  a  credit  for  the  whole  sum,  interest  de 
ducted  ;  but  in  less  than  ninety  days  the  parties  would  have 
employed  at  least  ninety  per  cent,  of  the  whole  amount  in  pay 
ing  each  other,  and  this  ninety  per  cent,  would  be  thus  wholly 
extinguished.  Nearly  all  men  of  business  who  give  promissory 
notes  in  the  course  of  their  transactions,  take  them  also.  Whilst 
each  individual  obtains  a  credit  for  the  notes  he  has  taken,  he 
finds  that  others  have  credit  for  the  notes  he  has  given.  The 
effect  is  the  same  as  if  the  bank  had,  at  the  instance  of  these 
parties,  opened  an  account  with  each  one,  charging  him  with  all 
the  notes  he  had  given,  and  giving  him  credit  for  all  that  he  had 
taken.  The  balance  would  then  have  to  be  paid  in  money.  By 
the  actual  process  in  bank,  this  result  is  obtained  by  allowing 
each  customer  to  draw  upon  his  credits  to  pay  his  debts  as  they 
mature.  Each  one  who  has  a  larger  credit  than  is  sufficient 
to  pay  his  debts,  may  call  on  the  bank  to  pay  him  that  excess 
in  money,  which  the  bank  can  do,  because  some  of  its  cus 
tomers  have  balances  in  money  to  receive,  and  others  have 
balances  to  pay ;  and  as  the  amount  of  these  differences  would 
be  the  same,  the  banks  would  receive  from  the  debtor  balances 
the  same  amount  they  Avould  have  to  pay  upon  the  creditor 
balances. 

It  is  this  very  large  proportion  of  mutual  indebtedness  which 
makes  the  methods  of  payment  adopted  by  the  banks  so  effi 
cient.  No  man  should  desire  better  payment  than  his  own  paper ; 
and,  in  fact,  the  chief  financial  effort  and  object  of  every  man  in 
business  is  to  apply  the  paper  he  has  received  in  business  to 
pay  that  which  he  has  given.  This  operation  proceeds  through 
many  a  devious  process,  but  with  certain  and  complete  success. 
Of  the  $684,000,000  of  loans  and  discounts  in  1856,  at  least 
$616,000,000  may  be  taken  as  the  amount  of  indebtedness  be 
tween  the  debtors.  This  large  sum  is  thus  extinguished  at  least 
four  times  every  year  by  a  virtual  set-off;  that  is,  every  creditor 
gives  up  enough  of  his  credits  to  pay  his  debts.  The  banks 
having  issued  credits  to  the  amount  of  $616,000,000,  for  indi 
vidual  paper  to  that  amount,  surrender  the  individual  paper  to 
those  who  return  the  equivalent  in  bank  credits.  The  complica- 


BANK    ISSUES    NOT    MONEY.  459 

tions  of  this  process  defy  human  scrutiny  as  to  the  details,  but 
it  is  always  making  progress  towards  the  proper  result.  A  man 
of  business  may  hold  notes  of  persons  residing  in  New  Orleans, 
Cincinnati,  Pittsburg,  Chicago,  and  Buffalo,  and  his  own  may 
be  held  by  persons  as  widely  scattered.  The  banks  give  a  pre 
sent  credit  on  their  books  for  these  wide-spread  debts,  and 
enable  him  to  face  his  notes,  as  they  are  presented,  by  checks 
on  his  credits,  so  far  as  his  credits  may  reach.  This  machinery 
of  credit  brings  to  every  man's  door  the  claims  which  others 
hold  against  him ;  and  it  furnishes  every  man  with  a  medium  of 
payment  adequate  to  the  purpose,  and  far  more  convenient  than 
coins  or  bullion. 

§  2.  Bank-notes  are  not  money  —  They  are  mere  promissory  notes  of  the 
banks —  They  are  intended  to  perform  the  functions  of  money,  and  can  be 
so  employed  —  Bank  deposits  can  be  so  employed,  but  are  not  money  — 
Both  are  substituted  by  banks  for  the  notes  of  individuals  —  Banks  can 
make  securities  of  paper,  but  cannot  make  money — The  convertibility  of 
bank-notes  does  not  make  them  money,  and  is  not  so  intended  ;  it  is  a  mere 
check  on  the  banks  —  Gold  and  silver  not  the  basis  of  bank  issues :  they 
are  based  on  the  paper  discounted  by  the  banks,  and  this  paper  is  based  on 
the  commodities  for  which  it  is  given —  Convertibility  a  dangerous  check — 
Employed  with  fatal  effect  against  those  who  rely  upon  it  —  It  abolishes 
time  on  commercial  paper. 

In  the  ordinary  language  of  trade,  bank-notes  and  bank  depo 
sits  are  called  money.  Writers  upon  the  subject  of  money  too 
often  class  all  kinds  of  currency  under  that  general  term.  But 
this  obliteration  of  needful  distinctions  should  be  discouraged, 
as  unfavorable  to  clear  views :  the  term  money  should  be  re 
stricted  to  coins  made  a  legal  tender  by  law  in  payment  of  debts. 
If  this  definition  is  departed  from,  who  can  tell  where  to  stop. 
There  remains  no  longer  any  clear,  defined  boundary  between 
that  which  is  money  and  that  which  cannot,  with  any  propriety, 
be  so  called.  If  bank-notes  are  money,  at  what  rate  of  discount 
do  they  cease  to  be  such  ?  If  bank  deposits  are  money,  are  they 
such  when  the  bank  is  in  bad  credit,  or  precisely  how  far  must 
a  bank  be  discredited  before  its  credits  cease  to  be  money  ?  Is 
a  bill  of  exchange,  or  promissory  note,  which  circulates  freely, 


460  CONFUSION    OF    TERMS. 

money  ?  If  it  be  said  that  all  bank-notes  and  bank  credits  pay 
able  on  demand  are  money,  then  do  they  cease  to  be  money  the 
moment  the  banks  suspend,  and  whilst  they  are  circulating  as 
freely,  and  performing  the  same  functions  as  before  ?  If  bank 
notes  payable  on  demand  are  money,  are  they  made  so  by  the 
promise  to  pay,  or  by  the  ability  to  pay  ?  If  by  the  former,  all 
notes  would  be  good ;  if  by  the  latter,  how  is  the  ability  to  pay 
to  be  ascertained  ?  It  is  well  known  to  every  one,  that  no  banks 
of  circulation  and  deposit  can  pay  on  demand  all  their  liabili 
ties  ;  they  may,  nevertheless,  be  perfectly  safe.  Is  their  ultimate 
safety  a  sufficient  ground  for  ranking  them  as  money?  Do 
bank-notes  become  money,  in  the  strict  sense  of  the  word,  when, 
like  the  notes  of  the  Bank  of  England,  they  are  made  a  legal 
tender  ?  If  so,  could  all  bank-notes  be  made  money  in  the  same 
way  ?  Questions  like  these  are  easily  multiplied  ;  and,  if  truly 
answered,  must  show  that  the  term  money  has  often  received  an 
application  far  too  wide. 

If  names  or  proper  designations  were  wanting,  there  would  be 
more  excuse  for  this  confusion  of  terms.  In  Venice  and  Genoa, 
the  term  bank  money  was  applied  to  the  funds  of  the  banks,  which 
were  for  a  long  period  at  a  high  premium  over  money  of  gold  or 
silver.  In  modern  times,  we  have  the  terms  bank-notes,  bank 
deposits,  currency,  circulation,  and  cash.  -The  term  money  pro 
perly  means  the  legal  coinage  of  gold  or  silver,  or  other  coins, 
made  a  legal  tender;  the  term  currency  may  include  all  the 
various  substitutes  for  money  which  circulate  like  money,  and 
perform  the  same  or  similar  functions.  Where  bank-notes  are 
made  a  legal  tender,  they 'may  be  called  paper-money.  It  may 
not  be  necessary  to  be  always  precise  in  maintaining  these  dis 
tinctions  ;  but  when  precision  is  necessary,  they  should  be  kept 
clearly  in  view. 

Bank-notes,  deposits,  checks,  bills  of  exchange,  promissory 
notes,  and  other  things  of  like  kind,  which  have  been  extensively 
and  successfully  used  as  substitutes  for  money,  should  not  be 
confounded  with  money.  Almost  all  these  substitutes  are  really 
evidences  of  debt,  the  amount  of  which  is  clearly  expressed  on 
their  face  in  money  of  account.  They  pass  for  an  expressed 


BANK-NOTES    MERELY    PROMISSORY    NOTES.      461 

amount,  which  is  payable  in  money  on  demand,  or  at  a,  future 
day,  but  -which  payment  is  not  made,  and  never  expected,  as  it 
is  always  adjusted  in  another  way.  They  readily  fulfil  every 
function  of  money,  by  reason  of  the  great  demand,  which  makes 
them  as  desirable  as  money,  and  far  more  sought  for.  We  may 
repeat  here  an  illustration  we  have  frequently  before  employed. 
If  A.  and  B.  have  dealt  with  each  other  to  the  amount  of  $5000, 
A.  having  in  his  books  charged  B.  with  $400,  with  $1500,  and 
$600 ;  B.  having  charged  A.  with  $600,  with  $1600,  and  $300. 
These  several  sums,  as  they  stand  on  their  respective  books,  are 
not  in  any  sense  money,  although  the  Several  amounts  are  stated 
in  money  of  account ;  yet  A.  and  B.  may,  at  any  moment,  pay 
each  other  in  full,  by  balancing  these  accounts.  As  they  stood 
on  the  books,  they  were  but  evidences  of  debt ;  and  the  accounts, 
when  balanced,  are  but  evidences  of  payment.  If  A.  and  B., 
instead  of  paying  in  that  way,  issue  their  notes  to  each  other, 
payable  at  sixty  days  from  each  transaction,  these  notes,  if 
negotiated  in  payment  for  goods,  do  not  become  money,  but 
remain  evidences  of  debt.  If  A.  and  B.  'carry  these  notes  to 
bank,  and  have  them  discounted,  receiving  bank-notes  in  their 
place,  they  each  remain  debtor  for  the  notes  respectively  given, 
and  the  bank  becomes  debtor  for  the  bank-notes  issued  in  the 
purchase  of  this  paper.  These  bank-notes  may  perfectly  per 
form  every  function  of  money,  but  they  can  be  nothing  more 
than  the  promises  of  the  bank  to  pay.  The  bank  holds  a  claim 
upon  A.  and  B.  for  the  full  amount  of  the  promises  it  has  issued 
in  this  case ;  and  it  expects  A.  and  B.  to  return  an  equivalent 
sum  in  these  promises,  or  to  pay  their  note  in  something  that 
will  enable  the  bank  to  redeem  them.  These  bank-notes  are  but 
the  issues  of  a  promissory  note  of  the  bank  in  a  convenient  form 
for  circulation,  in  place  of  the  notes  of  A.  and  B. ;  and  they 
are,  in  reality,  no  more  money  than  the  notes  of  A.  and  B., 
though  far  more  suitable  and  effective  substitutes.  They  may 
become  as  efficient  in  the  purchase  of  all  commodities  as  money, 
and  far  more  efficient  and  convenient  in  the  payment  of  debts ; 
but  this  by  no  means  converts  them  into  money.  They  can 
not  be  employed  in  paying  balances  of  foreign  trade,  nor 


462  SPECIE    LITTLE    USED    IN    PAYMENTS. 

even  in  the  discharge  of  balances  between  remote  points  at 
home. 

It  is  no  more  the  province  of  the  banks  to  create  money,  than 
it  is  in  their  power,  nor  should  their  issues  be  treated  or  regarded 
as  money.  Their  great  function  is  that  of  effecting  payments ; 
they  open  accounts  with  men  who  are  both  debtors  and  creditors, 
and,  by  means  of  the  facilities  they  afford  these  debtors  and 
creditors,  adjust  their  mutual  claims,  and  pay  and  receive  their 
balances,  to  the  amount  of  thousands  of  millions  yearly,  without 
any  use  of  money,  or  any  need  of  it.  The  great  fact,  that  nine- 
tenths  of  the  payments  of  business  in  the  United  States,  above 
the  mere  distribution  effected  by  the  retail  trade,  are  made  with 
out  any  use  of  money,  is  one  which  should  never  be  left  out  of 
view  by  statesmen  and  economists.  If  such  payments  are  effective, 
correct  in  theory  and  practice,  should  not  the  principle  be 
understood,  and  the  practice  promoted,  protected  and  extended? 
If  a  million  of  men  in  the  United  States  owe,  on  the  average, 
§10,000  each  upon  notes  maturing  within  three  months,  this 
would  require,  if  paid  in  money,  the  sum  of  $10,000,000,000. 
The  whole  amount  of  specie  in  the  banks  being  $60,000, 000, 
the  payments  above  would  require  this  amount  of  specie  to 
change  hands  nearly  twice  every  day,  and  besides,  to  change  its 
location  from  bank  to  bank,  and  state  to  state,  hundreds  of 
miles  apart,  with  a  rapidity  equal  to  the  despatch  of  the  tele 
graph  —  a  movement  as  impossible  as  it  would  be  absurd,  if  it 
were  possible.  This  great  payment  is  effected  with  perfect 
facility  by  the  processes  of  the  banks,  without  any  other  move 
ment  of  the  $60,000,000  than  paying  the  amount  of  some 
comparatively  trifling  balances.  In  the  regular  operation  of 
banking,  the  sum  of  $60,000,000  in  specie  would  not  change 
hands  once  in  a  year. 

In  the  great  movements  of  industry  and  trade,  goods  and  ser 
vices  pay  for  goods  and  services ;  the  promissory  notes,  bank 
notes,  bank  credits,  or  other  currency,  which  intervene,  are 
devices  of  adjustment,  and  not  the  very  payment  ultimately 
aimed  at.  Men  give  what  they  have  to  spare,  to  obtain  what 
they  desire.  If  they  do  not,  in  the  first  instance,  sell  for  money, 


INSUFFICIENCY    OF    COIN.  463 

and  with  that  purchase  what  they  want,  they  take  a  security  or 
evidence  of  debt ;  they  make  their  purchases  upon  their  individual 
credit,  and  give  evidences  of  debt.  The  debt  and  credit 
extinguish  each  other  in  the  banks,  and  the  parties  have,  in  sub 
stance,  exchanged  goods ;  all  the  rest  is  merely  keeping  and 
balancing  accounts  between  them.  These  securities  are  issued, 
in  this  country,  to  an  amount  not  less  than  §1,000,000,000 
every  three  months,  in  which  period  this  amount  continually 
runs  off  and  is  renewed,  making  $4,000,000,000  in  the  year. 
Of  this  $1,000,000,000  of  securities,  the  banks  become  the 
owners  and  collectors ;  and  for  half'this  amount,  they  are  under 
a  constant  engagement  to  pay  money  on  demand.  To  meet  this 
engagement,  the  banks  hold  $600,000,000  against  $500,000,000, 
or  twelve  per  cent,  of  the  amount.  Of  course,  absolute  conver 
tibility  of  all  this  fund  of  securities  into  specie,  on  demand,  is  an 
impossibility.  If  all  the  gold  and  silver  in  the  country,  esti 
mated  at  $250,000,000,  were  in  the  banks,  it  would  be  an  impos 
sibility.  It  must,  therefore,  continue  to  be  impossible ;  and 
hence  arises  one  of  the  gravest  difficulties  connected  with  banks 
of  circulation. 

If  bank-notes,  like  checks  upon  banks,  were  confined  in  their 
use  and  circulation  to  those  at  whose  special  instance  they  are 
issued,  and  whose  debts  are  to  be  adjusted  by  them,  there  would 
be- less  occasion  for  any  public  intervention  or  concern.  For 
the  public  have  little  interest,  whether  men  thus  mutually  in 
debted  discharged  their  debts  by  balancing  accounts,  by  bank 
notes,  or  by  checks  on  banks.  But  the  experience  of  a  century 
and  a  half  has  shown  that,  where  bank-notes  are  offered  as  a 
currency,  they  are  freely  received,  and  soon  become  the  chief 
medium  of  exchange.  It  is  almost  invariably  true  that,  wherever 
bank-notes  are  offered  as  a  currency,  with  even  the  slightest  pre 
tensions  to  regularity  and  security,  they  are  accepted,  and  pass 
rapidly  into  general  circulation.  This  facility  of  converting 
bank  paper  into  a  currency  is  a  strong  temptation  to  resort  to 
it,  and  accounts  in  part  for  the  multiplication  of  banks  of  circu 
lation  in  this  country,  and  elsewhere ;  but  it  has  given  rise,  also, 
to  that  ceaseless  jealousy  with  which  this  system  of  banking  has 


464  SAFETY    OF    BANK-NOTES. 

been  watched.  There  is,  perhaps,  more  ground  for  this  jealousy 
than  many  friends  of  the  system  have  been  willing  to  acknow 
ledge.  If  the  circulation  of  bank-notes  had  been  confined  to  the 
payment  of  the  debts  in  which  they  originate,  no  more  mischief 
could  ensue  than  now  arises  from  the  employment  of  checks 
upon  banks,  which  the  parties  using  them  are  interested  to  keep 
within  legitimate  and  safe  bounds.  But  as  bank-notes,  wherever 
offered,  secure  a  wide  circulation,  it  is  not  enough  to  say,  let 
people  take  them  at  their  risk,  as  they  take  them  at  their  discre 
tion.  Every  one  who  takes  bank-notes  for  his  goods  may  refuse 
them,  if  he  will ;  and  every  one  who  takes  them  for  a  debt,  takes 
them  in  place  of  gold  or  silver,  which  the  law  gives  him  the 
right  to  exact.  The  question  then  is,  what  security  or  protection 
should  be  provided  for  those  who  will  receive  bank-notes  as  a 
currency  ? 

Public  policy  has  determined  that  although  the  taking  bank 
notes  is  optional,  yet  the  best  security  should  be  given  for  their 
safety  as  a  medium  of  exchange,  of  which  the  nature  of  the  case 
admits.  The  circulation  of  bank-notes  is,  no  doubt,  a  mutual 
advantage  to  the  bank  and  the  public ;  but  the  bank  acts  as  one 
body,  while  the  public  acts  by  its  individual  members,  who  are 
only  occasionally  and  variably  interested  in  bank-notes.  The 
bank  can,  by  one  act,  make  all  who  shall  become  holders  of  their 
notes  secure ;  and  this  tends  not  only  to  the  confidence  of  the 
public,  but  to  a  more  watchful  management  of  the  bank.  It 
should  not  be  the  privilege  of  banks,  or  of  individuals,  to  issue 
notes  in  small  sums,  to  circulate  widely  as  a  currency,  without 
first  giving  ample  security.  The  banks  can  afford  to  do  this, 
without  injury  to  any  legitimate  business.  In  the  United  States, 
in  more  than  a  score  of  States,  the  utmost  ingenuity  of  politi 
cians  has  been  taxed  to  provide  adequate  restraints  upon  bank 
ing.  Two  modes  have  been  adopted,  which  are  chiefly  relied 
upon  —  one,  simply  the  convertibility  of  all  bank  paper  into 
specie  on  demand ;  and  the  other,  in  addition  to  convertibility, 
the  deposit,  with  an  officer  charged  by  law  with  that  duty,  of 
some  public  security  of  the  United  States,  or  of  one  of  the  States, 
or  of  some  other  stock  or  bonds,  for  the  notes  issued  to  all  the 


CONVERTIBILITY    OF    BANK    ISSUES.  465 

banks  of  the  State.  The  latter  is  the  best,  and  far  the  most  suc 
cessful  yet  adopted,  and  capable  of  being  made  still  more  effectual. 

In  regard  to  the  convertibility  of  bank-notes  on  demand,  there 
are  difficulties  so  serious,  that  scarcely  any  approach  has  been 
made  towards  overcoming  them.  We  have  already,  in  the  chap 
ter  on  the  Bank  of  England,  shown  how  notes  on  demand  came 
first  to  be  issued,  under  the  belief  that  the  whole  sum  which 
might  be  thus  issued  would  never  be  demanded  at  once,  and  that 
it  would  be  practicable  for  the  bank  to  pay  in  specie  all  that 
would  be  presented.  That  this  was  a  shrewd  guess,  when  it  was 
made,  is  very  true ;  and  that  it  made  the  bank  popular  in  its 
early  career  is  also  true ;  but  it  has  opened  some  questions  so 
difficult,  that  more  than  a  century  and  a  half  of  varied  trial,  and 
bitter  experience,  have  failed  to  solve  them.  The  question  of 
convertibility  has  certainly  labored  under  disadvantages  which 
have  been  particularly  unfriendly  to  the  progress  of  truth.  Ever 
since  notes  payable  on  demand,  now  called  bank-notes,  have 
come  into  constant  use,  there  has  been  a  numerous  class,  both  in 
England  and  in  the  United  States,  who  regard  them  with  dis 
trust,  and  yet  scarcely  endure  any  discussion  which  questions 
the  advantage  of  immediate  convertibility.  This  is  a  mistake,  and 
its  prevalence  beclouds  the  whole  subject.  If  convertibility,  in 
the  sense  in  which  it  is  now  understood,  be  a  sound  and  desira 
ble  policy,  it  can  be  shown  to  be  so  both  by  fact  and  argument ; 
at  any  rate,  let  the  grounds  upon  which  it  rests  be  thoroughly 
understood. 

If  the  question  were  simply,  whether  banks  or  bankers  who 
receive  the  privilege  of  issuing  promissory  notes  payable  on  de 
mand,  to  circulate  as  a  medium  of  exchange,  should  give  ample 
security  to  the  public  that  their  notes  should  be  safe  and  good, 
it  would  admit  of  no  discussion.  The  readiness  with  which 
people  generally  receive  paper  currency  makes  this  privilege  of 
issuing  bank-notes  one  of  great  importance,  and  requiring  jealous 
care.  If  no  other  adequate  security  could  be  given,  the  ques 
tion  would  be  settled,  for  clearly  some  security  should  be  given ; 
not  merely  so,  the  best  security  should  be  given.  The  abuses  to 
which  this  privilege  of  issuing  bank-notes  is  subject,  the  tempta- 
30 


466  FUNCTION    OF    BANK-NOTES. 

tion  it  involves,  demands  the  best  possible  guarantees.  It  is  now 
generally  acknowledged,  tbat  the  promise  to  redeem  bank-notes 
on  demand,  however  desirable  performance  may  be,  and  however 
numerous  the  legal  enactments  to  secure  and  enforce  it,  has  not 
proved  an  adequate  protection  to  the  public,  either  against 
abuses  in  the  issue  of  notes,  or  in  ensuring  a  circulation  of  bank 
notes  entirely  safe  and  good.  The  security  now  required  in 
many  of  the  States  by  the  deposit  of  stocks  has,  it  is  well- 
known,  proved  the  most  effectual  safeguard  against  loss  by  the 
public  yet  tried.  No  doubt  this  mode  of  security  could  be  carried 
to  a  point  which  would  be  beyond  all  ordinary  hazard.  Con 
sidered  apart,  safety  and  soundness  in  the  circulation  must  be 
preferable  to  a  mere  promise  of  convertibility ;  for,  after  all,  if 
the  latter  be  relied  upon,  the  security  consists  merely  of  a  pro 
mise.  Penalties  cannot  make  the  promise  good.  Hanging  does 
not  prevent  murder. 

If  bank-notes  were  presented  regularly  for  payment  at  some 
stated  intervals,  the  ability  of  banks  to  pay  would  be  regularly 
ascertained ;  but  of  the  bank-notes  issued  in  the  United  States, 
not  one  dollar  in  a  thousand  is  ever  presented  for  payment  in 
specie.  These  notes  perform  all  the  functions  expected  of  them, 
and  scarce  a  thought  is  entertained  of  presenting  them  to  the 
bank  for  payment.  So  long  as  they  continue  to  circulate,  their 
efficiency  as  a  medium  of  exchange  is  complete  :  as  to  this,  they 
are  not  dependent  upon  the  promise  to  pay  them  in  coin.  It 
is  not,  then,  that  bank-notes  may  be  useful,  that  they  are  pay 
able  on  demand ;  it  is,  that  they  may  be  subjected  to  a  constant 
test  of  their  soundness.  But  as  the  incessant  application  of  that 
test  would  take  away  all  the  convenience  in  their  use,  people 
decline  applying  it :  and  the  circulation  proceeds  upon  a  tacit 
understanding  between  the  banks  and  the  people,  to  the  effect 
that,  if  the  notes  are  not  presented  for  payment,  specie  pay 
ments  shall  be  faithfully  maintained  :  if  the  notes  are  presented, 
payment  is  impossible.  The  security  of  paper  currency  rests,  in 
the  opinion  of  many,  upon  this  slender  basis.  They  are  so 
wedded  to  convertibility,  that  they  prefer  the  pretence,  or  name, 
to  substantial  security  in  any  other  mode.  The  undeniable  fact 


PAYMENT    ON    DEMAND.  467 

that  convertibility  is  a  mere  pretence,  that  it  is  not  now,  and 
never  has  been,  possible  in  England  or  in  the  United  States, 
should  have  secured  for  the  subject  better  treatment  than  it  has 
yet  received.  That  the  banks,  to  whom  this  great  privilege  is 
conceded,  of  issuing  bank-notes,  should  furnish  the  business 
public  with  such  amount  of  the  precious  metals  as  the  current 
wants  of  business  demand,  would  be  a  reasonable  requirement, 
and  one  with  which  they  would  be  able,  and  could  be  forced,  to 
comply.  The  banks  have  always  been  able  to  do  this ;  for,  iu 
the  large  transactions  of  the  domestic  interchange  of  products, 
more  than  five  per  cent,  of  the  payments  is  very  seldom,  if  ever, 
required. 

In  July,  1857,  the  banks  in  the  city  of  New  York,  where  the 
proportion  of  specie  is  greatest  and  of  bank-notes  least,  con 
tained  $13,000,000  of  specie,  and  $104,000,000  of  circulation 
and  deposits ;  that  is,  they  were  subject  to  a  demand  for  eight 
times  as  much  specie  as  they  had  on  hand.  Of  course,  the  banks 
of  New  York  were  badly  insolvent,  if  ability  to  pay  these  de 
mands  in  specie  was  a  proper  criterion.  But  it  is  indisputable, 
that  these  banks  were  then  sound,  and  able  to  pay  every  cent 
they  owed,  for  the  public  was  then  indebted  to  the  banks  the 
sum  of  $116,000,000.  Between  July,  1857,  and  January,  1858, 
the  public  reduced  its  debt  to  the  banks  to  $97,000,000,  and  the 
banks  increased  their  stock  of  specie  to  $29,000,000,  whilst  the 
circulation  and  deposits  fell  to  $85,000,000.  But,  with  all  this 
great  change  in  favor  of  the  banks,  the  liabilities  payable  on 
demand  were  nearly  three  times  greater  than  the  amount  of 
specie.  Under  such  circumstances,  it  is  surely  forbearance  that 
keeps  the  currency  sound,  and  not  convertibility. 

By  returns  brought  down  to  the  close  of  the  year  1856,  the 
1416  banks  in  the  United  States  had  in  their  vaults  $58,000,000 
in  specie,  against  which  there  were  bank-notes  and  deposits  to 
the  amount  of  $445,000,000  ;  that  is,  the  sums  due  by  the  banks, 
and  payable  on  demand,  were  more  than  seven  and  one-half 
times  greater  than  the  amount  they  had  to  meet  them.  It  scarce 
requires  a  glance  at  these  figures  to  see  that,  if  the  solvency  of 
these  banks,  or  the  goodness  of  their  notes,  and  safety  of  the 


468      THE  REAL  MEDIUM  OF  PAYMENT. 

deposits,  depended  on  their  ability  to  pay  their  notes  and  depo 
sits  in  specie,  they  were  very  unsound.  But  these  banks  were 
good  and  safe,  because  they  held  a  claim  on  the  public  for 
$684,000,000,  which  absorbed  every  day  from  eight  to  ten 
millions  of  these  bank-notes  and  deposits,  and  entirely  pays 
them  off,  on  an  average,  more  than  four  times  every  year.  The 
truth  is,  that  men  of  business  in  the  United  States  find  it  much 
more  important  to  attend  to  the  daily  demand  of  the  banks  on 
them,  than  to  give  themselves  any  concern  about  their  demand 
on  the  banks.  The  banks  have  a  demand  on  the  men  of  busi 
ness  for  $684,000,000,  accruing  in  the  course  of  every  two  or 
three  months,  every  dollar  of  which,  although  payable  at  matu 
rity  in  gold  or  silver,  they  are  willing  to  take,  and  do  take,  in 
their  own  notes  and  deposits.  The  banks  waive  a  demand  on 
the  public,  every  three  months,  of  §684,000,000  in  specie,  and 
ask  forbearance  for  the  sum  of  $445,000,000.  The  real  ad 
vantage  afforded  by  the  banks  is  not  that  they  furnish  a  safe 
place  of  deposit  for  gold  and  silver,  for  a  very  small  portion  of 
the  deposits  are  made  in  coins  or  bullion,  and  of  those  which  are 
so  made  the  depositors  receive  them  back  in  bank-notes,  or  pay 
them  away  by  a  check ;  it  is  not  that  the  banks  furnish  notes 
payable  on  demand  in  gold  or  silver ;  but  it  is,  that  the  banks 
furnish  a  medium  of  payment,  to  the  amount  of  $445,000,000, 
far  more  effective  in  the  payment  of  debts  than  gold  itself,  and 
so  acceptable  in  form,  as  to  be  everywhere  employed  as  the  chief 
instrument  of  payment. 

We  have  said,  and  the  figures  we  have  adduced  show,  that 
convertibility  of  the  notes  and  deposits  of  our  banks  is  impossi 
ble,  even  when  the  banks  are  in  the  best  condition.  And  that 
this  must  continue  to  be  the  case,  constituted  as  the  banks  of  the 
United  States  are,  is  as  certain.  The  main  feature  of  the  busi 
ness  of  these  banks  is  the  discount  of  notes  maturing  at  a  future 
time :  we  have  previously  assumed  that  the  average  time  to  run, 
of  the  paper  thus  discounted,  is  ninety  days,  or  one-fourth  of  a 
year.  They  issue  to  the  parties  at  whose  instance  these  dis 
counts  are  made,  their  notes  payable  on  demand,  or  give  them 
credit  on  their  books  for  the  proceeds,  payable  in  like  manner 


MUTUALITY    OF    DEBTS.  469 

on  demand.  The  deposits  of  the  banks  are  made  up,  almost 
altogether,  from  the  notes  thus  issued,  and  the  credits  thus 
granted.  The  circulation  and  deposits  of  1856  amounted  to 
$445,000,000,  for  which  the  banks,  by  this  mode  of  doing  busi 
ness,  became  liable  on  demand ;  that  is,  they  received  from  their 
customers  claims  on  the  public  maturing  in  three  months,  and 
they  became  liable  to  pay  a  certain  amount  on  demand  ;  in  the 
year  1856,  for  instance,  in  every  three  months,  $445,000,000, 
and  in  1857,  in  every  like  period,  $500,000,000.  The  paper 
discounted  by  the  banks  not  being  payable  on  demand 
would  only  be  paid,  and  could  only  be  demanded  as  it  matured 
from  day  to  day;  whether  the  sums  thus  paid  into  the 
banks  were  eight  or  ten  millions  daily,  it  was  all  the  banks 
could  exact,  and  if  the  notes  had  not  been  discounted,  the 
amount  required  to  pay  them  would  have  been  the  same.  But 
the  banks  became  liable  to  -the  payment  of  from  $445,000,000 
to  $500,000,000  in  anyone  day  in  1856  and  1857  — a  position, 
stripped  of  the  mists  and  prejudice  which  constantly  surround 
it,  which  should  be  called,  as  it  really  is,  stupendously  absurd ; 
and,  in  times  of  commercial  revulsion,  not  less  dangerous  than 
absurd. 

If  the  business  men  of  the  United  States  owe  among  them 
selves,  at  any  one  time,  $700,000,000,  payable  in  the  course  of 
three  months,  that  payment  can  be  required  only  as  the  paper 
matures.  The  time  of  maturity  is  that  fixed  by  the  parties  to 
this  paper ;  it  is  determined  by  the  exigencies  of  the  business 
in  which  they  may  be  engaged,  and  it  is  a  part  of  the  contract. 
The  question  among  the  parties  to  such  notes  is  not  whether 
they  will  be  paid  at  maturity  in  specie,  but  whether  they  will  be 
paid  according  to  the  usages  of  trade,  and  to  the  satisfaction  of 
the  holders.  The  parties  to  this  paper  could  not,  as  a  body, 
anticipate  the  payment ;  by  no  possibility  could  they  pay,  on 
the  2d  of  May,  the  entire  sum  accruing  between  the  1st  of  May 
and  the  1st  of  July.  Their  ability  to  pay  depends  on  the  gradual 
manner  in  which  the  notes  mature  —  each  month  requiring  the 
third  of  the  whole,  and  each  day  only  its  share ;  the  amounts 
paid  one  day  assisting  in  the  payments  of  the  next,  and  so  on. 


470        NATURE  OF  BANK  CURRENCY. 

The  banks  in  1856,  however,  issued  credits  and  bank-notes  to 
the  amount  of  §445,000,000,  payable  on  demand,  in  exchange 
for  $684,000,000,  maturing  in  the  course  of  three  months. 
They  undertake  what  they  cannot  perform,  and  thenceforward 
exist  from  day  to  day  on  public  forbearance. 

The  bank-notes  and  bank  credits  issued,  in  our  system  of 
banking,  for  discounted  paper  being  merely  substitutes  for  this 
matured  individual  or  business-paper,  the  banks  should  not,  in 
strictness,  as  we  have  often  urged,  undertake  nor  be  bound  to 
pay  the  notes  or  credits  issued  sooner  than  the  maturity  of  the 
paper  discounted.  Whilst  the  banks  have  always  a  larger  de 
mand  on  the  public  than  the  public  has  on  them,  and  whilst  the 
banks  are  willing  to  take  their  own  notes  and  checks  upon  depo 
sit  in  payment  of  what  is  due  to  them,  there  can  be  neither  risk 
nor  inconvenience  in  allowing  them  the  same  time  to  pay  specie 
which  individuals  accord  to  each  ather.  This  is  all  that  the 
banks  can  be  forced  to  do,  simply  because  it  is  all  that  is  possi 
ble.  Under  such  a  regulation,  no  suspension  of  payments  could 
occur.  The  banks  could  safely  keep  up  the  supply  of  currency, 
even  in  the  midst  of  a  commercial  crisis ;  as  there  is  always 
more  than  enough  due  to  the  banks  to  absorb  all  their  currency, 
and  keep  up  a  demand  strong  enough  to  maintain  its  value. 
"When  subjected  to  the  test  of  instant  convertibility,  it  may  fail, 
but  be  perfectly  good  for  the  discharge  of  debts,  which  is  the 
use  to  which  nine-tenths  of  the  bank  currency  is  applied.  A 
good  bank  maybe  destroyed  by  the  test  of  instant  convertibility, 
but  remain  a  perfectly  sound  and  useful  institution,  tried  by  the 
fitness  of  its  issues  to  pay  debts. 

It  is  well  known  that  bills  of  exchange  and  promissory  notes 
are  employed  in  some  parts  of  England,  and  especially  in  Lan 
cashire,  as'  a  currency,  until  within  a  few  days  of  their  matu 
rity  :  so  far  as  they  are  susceptible  of  being  thus  employed,  they 
are  none  the  less  available  because  they  are  not  due.  So  with 
bank-notes  and  deposits,  they  would  perform  every  useful  func 
tion  to  which  they  are  applicable  as  well  as  they  do  now,  if  they 
were  not  payable  in  gold  or  silver  for  sixty  days.  It  is  only 
necessary  for  the  banks  to  receive  them  in  payment ;  this  alone 


THE    LIMITATION     OF    CREDITS.  471 

will  make  them  good.  The  attempt  to  make  them  better,  by 
making  them  convertible  on  demand,  makes  them  worse,  by  sub 
jecting  the  banks  to  a  condition  they  cannot  fulfil,  and  forcing 
them  to  defend  themselves  from  sudden  and  needless  attacks  by 
a  contraction  of  their  issues,  which  spreads  ruin  and  disaster  far 
and  wide.  The  people  insist  upon  instant  convertibility  —  a 
thing  in  itself  impossible  :  the  banks  wait  the  day  of  onslaught, 
and  then,  in  the  struggle,  cast  the  whole  penalty  of  their  failure, 
with  tenfold  more  of  evil,  upon  the  shoulders  of  those  who  im 
posed  upon  them  so  absurd  a  liability.  The  people  are  guilty 
of  an  absurdity,  but  they  arm  the  banks  with  full  power  to 
punish  them  with  severity  for  the  folly  of  insisting  upon  their 
own  terms. 

Independent  of  all  other  considerations,  there  is  one  circum 
stance  which  should  control  both  legislation  and  practice  in  this 
matter.  Individuals  in  their  dealings,  governed  by  the  exigen 
cies  of  trade  and  the  progress  of  trade,  give  credits  on  their 
sales  of  from  one  to  six  months.  In  their  estimation,  the  pay 
ments  can  be  secured,  or  adjustments  effected,  within  or  at  the 
maturity  of  that  time.  The  banks  step  in  and  take  the  securi 
ties  given,  bearing  that  time,  and  receive  the  power  of  exacting 
payment  accordingly.  In  doing  so,  they  agree  to  become  debtors 
to  the  public  for  nearly  an  equal  amount,  payable  on  demand. 
They  destroy,  in  this  way,  the  safe  arrangement  made  between 
the  original  parties  to  the  paper  discounted ;  they  change  the 
time  when  payment  in  money  could  have  been  demanded  be 
tween  the  parties  to  the  paper,  and  they  introduce  an  element 
of  serious  disturbance  in  what  otherwise  could  have  been  settled 
without  danger  of  trouble.  The  banks  should  neither  lengthen 
nor  shorten  the  credits  of  commerce,  but  aim  only  to  effect  the 
payments  of  their  customers  at  the  time  fixed.  Convertibility 
on  demand  abolishes  time  on  paper  discounted  by  the  banks ; 
for  the  banks  undertake  to  pay  on  demand  hundreds  of  millions, 
which  men  of  trade  only  agreed  to  pay  within  the  period  of 
ninety  days. 

The  expediency  of  making  the  issues  of  the  banks  payable 
on  demand  does  not,  then,  arise  from  any  necessity  of  making 


472      PROPORTION    OF    BANK    ISSUES    TO     SPECIE. 

them  so  that  they  may  be  effective  as  a  means  of  payment,  but 
solely  as  a  restraint  upon  the  banks.  But  the  imposition  of  a 
restriction  upon  the  banks,  in  the  shape  of  a  condition  which  it 
is  impossible  for  them  to  fulfil,  has  proved  a  security  which  of 
course  always  fails  in  the  hour  of  trial.  In  times  of  confidence, 
the  banks  enjoy  years  of  undisturbed  quiet;  when  trouble  comes, 
and  confidence  is  lost,  men  realize  that  the  banks  cannot 
change  paper  into  gold.  People  never  demand  payment  of  the 
bank-notes  in  circulation,  unless  they  are  alarmed ;  demand  is 
then  without  avail,  because  it  is  general ;  and  payment  is 
stopped.  Payment  on  demand  is  not  necessary,  in  the  regular 
progress  of  business ;  as  a  security,  it  is  delusive  and  unavailable 
in  the  hour  of  need ;  and  as  a  restraint,  it  is  not  sufficiently 
effective.  The  history  of  banks  of  circulation  proves  that  they 
never  restricted  their  issues  to  the  amount  they  could  pay  on 
demand ;  their  liabilities  have  ranged  from  two  to  ten  times 
the  amount  of  their  specie. 

Banks  of  circulation,  however,  here  and  elsewhere,  are  and 
continue  to  be  placed  under  stringent  legal  obligations  to  pay 
their  liabilities  in  coins.  If  any  law  could  compel  them  to  do 
this,  and  still  leave  them  power  sufficient  to  carry  on  the  busi 
ness  of  banking  with  the  same  advantage  to  their  customers  and 
the  public  as  at  present,  the  currency  they  would  furnish  would 
indeed  be  the  best  attainable  for  circulation.  For  a  paper  cur 
rency  of  sufficient  amount,  absolutely  and  at  all  times  converti 
ble,  would  combine  almost  every  conceivable  advantage.  The 
obstacle  is,  that  such  a  convertibility  is  impossible ;  no  legisla 
tion  can  accomplish  it ;  the  omnipotence  of  the  British  Parlia 
ment  could  not  achieve  it.  Even  the  unusual  provision  in  the 
constitution  of  the  State  of  New  York,  which  denies  the  power 
to  the  Legislature  of  legalizing  a  suspension  of  specie  payments, 
availed  not  in  1857,  during  the  fearful  panic  of  the  hundred 
days.  This  precaution  about  the  notes  did  not  extend  to  the 
deposits.  The  banks  suspended  upon  their  deposits,  which  were 
ten  times  the  amount  of  their  notes.  They  have  since  resumed, 
and  have  now  $31,000,000  of  specie  to  $90,000,000  of  notes 
and  deposits.  With  this  enormous  and  unusual  accumulation  of 


BANKS    ABSORB    THEIR    OWN    LIABILITIES.      473 

gold,  payment  on  demand  rests  only  on  the  forbearance  of  the 
people.  The  depositors  could  bring  the  banks  to  a  state  of  sus 
pension  in  two  hours.  Upon  this  state  of  facts,  the  common 
phrase  that  our  bank  circulation  is  based  on  gold  and  silver  is 
absolutely  untrue.  If  our  paper  currency  had  no  other  basis 
than  this  very  uncertain,  insecure,  and  ultimately  impossible 
convertibility,  it  could  not  be  upheld  for  a  week,  nor  even  a  day. 
The  real  basis  of  our  paper  currency,  that  which  does  sustain  it 
through  extraordinary  emergencies,  is  the  individual  promissory 
notes,  and  other  evidences  of  debt,  in  exchange  for  which  it  is 
issued.  These  must  all  be  paid,  or  the  debtors  must  fail  or  sus 
pend.  The  business  men  of  the  United  States  owed  the  banks, 
in  1856,  the  sum  of  §684,000,000;  and  the  banks  were  indebted, 
for  their  circulation  and  deposits,  $445,000,000.  If  we  suppose 
that  these  debtors  to  the  banks  were  100,000  in  number,  owing 
an  average  of  $6840  each,  all  this  mass  of  business  men  would 
be  active  agents  in  redeeming  the  issues  of  the  banks,  of  which 
the  average  burden  of  each  would  be  $4450.  The  products  of 
the  industry  of  a  country  being  sold,  individual  paper  being 
given  therefor,  and  the  issues  of  the  bank  being  given  for  that 
individual  paper,  it  is  evident  not  only  that  the  issues  are  based 
upon  that  paper,  but  it  is  equally  evident  that  the  commodities 
for  which  the  individuals  issued  their  paper  have  come  into  their 
hands,  that  they  have  these  commodities  to  offer  to  the  pub 
lic  for  the  notes  in  circulation,  and  for  checks  on  the  banks,  with 
which  to  pay  their  debts.  The  real  strength  of  the  banks  is  in  this, 
that  their  business  is  founded  on  the  trade  and  industry  of  the 
country ;  and  all  the  business  men,  with  the  commodities  of 
daily  consumption  in  their  hands,  are  under  the  strongest  in 
ducements  to  offer  these  commodities  for  the  notes  and  deposits 
of  the  bank. 

It  must  not,  then,  we  repeat,  be  supposed  that  the  basis  of  our 
paper  currency  is  specie ;  the  fact  is,  and  must  be,  otherwise ; 
that  is  no  foundation  to  be  relied  upon,  which  must  go  with  the 
first  flood.  No  superstructure  like  our  banking  system  should 
be  reared  upon  a  quicksand.  We  do  not  urge  this  as  an  argu 
ment  against  convertibility  on  demand,  in  the  aspect  of  a  check 


474      FIFTY    AGAINST    FIVE    HUNDRED    MILLIONS. 

upon  the  banks.  It  may  be  necessary  or  expedient,  but  cannot 
be  so  on  the  ground  of  its  being  the  basis,  or  adequate  security, 
of  bank  issues.  We  should  not  make  the  concession  even  by 
implication,  that  §50,000,000  or  $60,000,000  of  gold  and  silver 
can  be  any  proper  basis  for  issues  or  liabilities  of  the  banks  to 
the  amount  of  §445,000,000  to  $500,000,000  :  it  is  a  mere  de 
lusion,  to  regard  the  former  amounts  as  sufficient  to  sustain  a 
demand  for  the  latter.  If  some  of  the  European  potentates  who 
maintain  armies  of  half  a  million,  were  to  reduce  their  numbers 
to  fifty  thousand,  upon  the  mere  hope  of  forbearance  on  the  part 
of  those  who  could  injure  them,  they  would  act  as  wisely,  on  the 
vital  subject  of  public  defence,  as  we  do  in  regard  to  specie  pay 
ments  by  the  banks.  France,  with  fifty  thousand  men  in  arms, 
would  be  overwhelmed  in  a  day.  The  potentates  of  Europe  are 
not  so  indifferent  to  the  dictates  of  worldly  wisdom.  But  our 
banking  system  disregarding  alike  common  sense,  worldly  wisdom, 
and  the  lesson  of  Holy  Writ,  which  teaches  a  ruler  to  consider 
beforehand  whether  he  can  overcome  an  enemy  with  a  thousand 
who  comes  against  him  with  ten  thousand,  undertakes,  with  fifty 
millions  in  its  strong-holds,  to  meet  five  hundred  millions  always 
ready  to  come  against  the  banks. 

We  object,  then,  to  a  phrase  so  likely  to  mislead,  as  that  of 
calling  gold  or  silver  the  basis  of  paper  currency,  under  the  pre 
sent  constitution  of  our  banks.  The  obligation  to  pay  on  de 
mand  can  be  nothing  more  than  a  check  on  the  abuse  of  bank 
ing,  or  a  security  to  the  public,  and  as  such  only  should  it  be 
regarded  and  discussed.  If  it  be  indispensable,  it  is  upon  the 
ground  that  no  other  adequate  security  is  attainable.  We  do 
not  believe  this,  and  regard  this  attempt  to  place  the  credit  sys 
tem  on  the  back  of  our  coinage  system,  as  partaking  of  that  cau 
tion  and  wisdom  which  would  place  a  locomotive,  for  its  best 
service,  upon  a  one-horse  cart. 


NEW    YORK    CLEARING-HOUSE.  475 


$3.  Bank  issues  and  agency  the  chief  actual  medium  of  payment  —  New 
York  banks  in  1857 —  Contraction  of  the  currency  —  Fund  out  of  ivhicli 
debts  are  paid  —  Process  of  paying  continuous —  City  banks  and  country 
banks — The  former  chief  agents  in  payments  —  Demand  for  specie  — 
Panics  —  Results  —  Banks  increase,  despite  the  abuses  of  banking — Pro 
gress  and  effects  of  rapid  contractions  of  currency —  That  which  is  called 
specie  payments  —  Banks  at  the  mercy  of  the  mob,  and  the  men  of  busi 
ness  at  the  mercy  of  the  banks. 

But  whatever  may  be  said  in  defence  of  the  position,  that 
paper  currency  is  based  upon  the  precious  metals,  it  is  very  cer 
tain  that,  both  in  this  country  and  England,  paper  currency  is 
the  chief  medium  of  payment.  In  the  first  eight  months  of 
1857,  the  clearings  or  payments  at  the  New  York  Clearing 
house  fluctuated  between  $655,000,000  and  $770,000,000  for 
each  month.  In  addition  to  which,  large  payments  occurred,  not 
indicated  at  the  Clearing-house.  All  payments  made  in  any 
bank  by  a  check  on  that  bank  are  completed  there,  and  do  not 
go  to  the  Clearing-house.  The  banks  only  resort  to  the  Clear 
ing-house  for  the  adjustment  of  the  checks  they  receive,  and  the 
claims  they  hold  upon  other  banks.  The  monthly  payments  of 
New  York  were  little  less  than  $900,000,000,  from  January  to 
August,  1857.  During  that  time,  the  average  amount  of  specie 
in  the  banks  was  under  $12,000,000,  the  deposits  averaged 
$95,000,000,  and  the  circulation  $8,000,000.  It  is  apparent, 
then,  that  $103,000,000  of  bank-notes  and  deposits  effected,  by 
aid  of  the  books  of  the  banks,  payments  of  not  less  than 
$30,000,000  daily,  whilst  the  $12,000,000  of  specie  in  the  banks 
scarcely  moved  at  all. 

The  actual  agency  of  the  precious  metals  in  these  current 
daily  payments  is  altogether  too  small  to  be  either  appreciated  or 
noticed.  It  is  only  employed  for  the  payment  of  occasional 
balances  in  the  foreign  and  domestic  trade.  We  have  already 
adverted  to  the  fact  that,  when  the  panic  of  1857  set  in,  it 
cost  the  city  of  New  York  a  contraction  of  bank  facilities  to 
the  amount  of  $66,000,000  to  retain  $12,000,000  of  gold.  In 
August,  1857,  the  loans  of  the  New  York  banks  amounted  to 
$122,000,000,  and  the  deposits  to  $94,000,000 ;  in  the  middle 


476  CONTRACTION    OF    CURRENCY. 

of  October,  the  loans  had  fallen  to  $97,000,000,  and  the  depo 
sits  to  $52,000,000.  Thus  the  banks  were  obliged  to  with 
draw  from  the  public  $66,000,000  of  paper  currency,  to  keep 
$12,000,000  of  gold  in  their  vaults.  This  was  withholding 
$1,000,000  daily,  of  the  customary  bank  facilities,  for  sixty-six 
days.  So  long  as  the  banks  could,  by  this  extraordinary  con 
traction,  keep  their  average  of  specie  to  nearly  the  amount  of 
$12,000,000,  they  continued  it.  About  the  middle  of  October, 
even  this  terrible  expedient  failed.  The  patience  of  the  public 
gave  way;  the  people  stepped  into  the  banks  and  took  out 
$4,000,000  of  specie,  and  the  banks  stopped.  But  the  conse 
quences  and  operation  of  this  contraction  are  not  shown  by  the 
fact  of  the  withdrawal  of  $66,000,000  of  currency  in  as  many 
days.  The  amount  of  currency  at  any  particular  time  never 
exhibits  the  amount  of  payments  which  that  currency  can  effect 
in  a  single  day ;  its  power  or  efficiency  must  be  estimated  by  the 
sum  of  the  payments  which  can  be  accomplished  within  a  given 
time.  The  real  contraction  or  diminution  of  payments  would  be 
shown  by  a  comparison  of  the  actual  transactions  of  the  banks 
for  a  day  or  week  at  the  different  periods  compared.  As  it  has 
not  been  customary  to  report  the  whole  movement  of  the  funds 
in  the  banks,  we  must  resort  to  the  Clearing-house  for  the  best 
approximation.  The  average  clearings  in  New  York  exceeded 
$700,000,000  each  month,  from  January  to  August,  1857 ;  in 
September  they  were  $481',000,000 ;  in  October  they  were 
reduced  to  $308,000,000,  much  less  than  half  the  monthly 
average  from  January  to  August.  Here  is  an  actual  falling 
off,  in  the  monthly  payments  of  the  Clearing-house  alone,  of 
$350,000,000,  or  more  than  $12,000,000  daily:  that  is,  the 
effort  of  the  banks  to  keep  less  than  $12,000,000  of  specie,  in 
volved  a  diminution  of  the  payments  of  the  city  of  $12,000,000 
daily.  The  whole  sum  of  the  payments  made  in  the  Clearing* 
house,  in  the  months  of  September,  October,  November  and  De 
cember,  1857,  were  less,  by  $1,428,000,000,  than  the  amount 
paid  the  preceding  four  months.  The  severity  of  this  contrac 
tion  was  further  shown  by  the  advance  of  interest,  from  eight  to 


SPECIAL    FUNCTION    OF    THE    BANKS.  477 

ten  per  cent,  in  July,  to  twenty-four  and  thirty-six  per  cent,  in 
October. 

By  whatever  forms  or  complications  it  may  be  covered  or  ob 
scured,  the  main  business  of  the  banks,  especially  in  the  chief  ' 
places  of  trade  and  industry,  consists  in  this  payment  of  debts 
with  credits,  or  by  mutual  set-off.  The  banks  keep  books  for 
their  customers,  in  which  they  are  charged  with  the  notes  upon 
which  they  are  indebted,  and  credited  for  the  notes  discounted 
or  deposited.  These  notes  are  funded  on  the  books  of  the 
banks,  and  every  creditor  of  that  fund  can  use  it  to  pay  his 
debts.  It  is  obvious  that,  in  this  operation,  there  is  no  special 
virtue  in  the  individual  notes  discounted  or  paid  at  the  banks. 
These  notes  are  merely  evidences  of  debt.  The  debts  are  just 
as  susceptible  of  being  set-off  without  such  evidences,  as  with 
them.  Persons  who  are  mutually  indebted  upon  book  account 
may  set-off  their  debts,  or  balance  their  accounts,  upon  the 
evidence  of  their  books.  So  a  bank  may  keep  the  debt  and 
credit  account  of  a  thousand  persons,  may  set-off  their  debts  so 
far  as  they  are  mutual,  and  collect  the  balances  due  to  those 
who  have  more  coming  to  them  than  they  owe  upon  any  evidence 
of  indebtedness  which  the  parties  might  deem  sufficient.  This 
adjustment  may  be  effected  by  banks,  or  by  any  similar  institu 
tions  ;  the  mode  of  doing  it,  whether  by  bank-notes,  bank  depo 
sits,  or  the  books  of  the  bank,  is  not  of  the  essence  of  the  opera 
tion  ;  that  consists  in  discharging  or  extinguishing  debts  by 
credits. 

The  extent  to  which  this  is  done  yearly,  in  the  United  States, 
may  be  approximated  by  reference  to  the  movement  of  the  New 
York  banks.  The  returns  of  the  Clearing-house,  for  the  year 
1857,  give  over  $7,000,000,000'  as  the  amount  of  the  clearing 
between  the  banks.  Taking  the  whole  payments  of  the  city  at 
$8,000,000,000  yearly,  and  the  aggregate  of  the  whole  country 
at  tenfold  this  amount,  and  we  have  a  total  of  $90,000,000,000. 
Of  this  sum,  a  close  analysis  of  the  business  of  the  banks  shows 

1  If  the  last  half  of  1857  had  been  equal  to  the  first,  the  amount  would 
have  been  §8,000,000,000. 


478      FUNCTIONS    OF    THE    BANKS    CONTINUOUS. 

that  at  least  $85,000,000,000  are  paid  by  set-off — a  proportion 
which  will  not  be  very  different,  whether  the  real  amount  be 
more  or  less  than  the  above.  The  banks  have,  then,  a  vast  busi 
ness  of  adjustment  to  accomplish  among  their  customers,  which 
is  not  dependent  for  its  efficiency  or  success  upon  gold  or  silver, 
or  coinage.  This  indebtedness  is  all  expressed  in  a  money  of 
account  perfectly  understood  by  the  parties  who  employ  it.  In 
this  money  of  account,  a  thousand  or  a  million  of  debt  expresses 
precisely  the  same  value  as  a  thousand  or  a  million  of  credit. 
The  parties  are  dealing  upon  perfectly  equal  terms,  so  far  as  the 
figures  go,  and  in  a  language  they  perfectly  understand.  To 
make  these  payments,  they  require  neither  gold,  nor  silver,  nor 
coins,  nor  scales,  nor  weights,  any  more  than  they  are  required 
by  those  who  are  balancing  their  book  accounts. 

Another  feature  in  the  business  of  the  banks  should  not  be 
overlooked,  in  a  strict  analysis  of  their  processes.  If  they  were 
to  close  their  operations  strictly  every  year,  their  discounts  of 
interest  would  not  only  have  to  be  paid  in  money,  but  also  all 
the  debtor  balances  of  their  customers.  The  banks  can  only  be 
paid  in  their  own  paper  or  credits,  so  far  as  their  issues  go ;  all 
further  amounts  payable  to  the  banks  must  be  discharged  in 
money,  or  what  is  equally  good  to  the  banks.  But  the  business 
of  the  banks  is  continuous ;  they  are  constantly  receiving  and 
reissuing  their  own  notes  and  credits.  In  the  year  1857,  the 
loans  of  the  banks  averaged  $728,000,000,  which  amount  would 
run  off,  on  the  average,  and  be  renewed  at  least  every  ninety 
days,  making  the  sum  of  the  loans  or  discounts,  for  the  year, 
$2,912,000,000.  To  keep  up  the  daily  average  of  $728,000,000 
would  require,  on  every  day,  a  payment  of  over  $8,000,000,  and 
a  daily  or  weekly  receipt  of  discounted  paper  large  enough  to 
restore  the  amount  thus  daily  paid  off  and  extinguished.  The 
banks  thus  carry  on  a  constant  business  of  issuing  new  currency 
as  the  old  is  returned.  Strictly  speaking,  a  bank-note  is  only  a 
medium  to  pay  bank  debts ;  so,  also,  with  credits  for  proceeds 
of  notes  discounted  in  the  shape  of  deposits.  In  practice,  they 
are  efficient  substitutes  for  money,  because  the  debtors  to  the 
banks  must  have  them.  The  banks,  therefore,  can  safely  take 


BANK     REFORMERS    AND     BANK-NOTES.          479 

their  own  issues  for  profit  or  interest,  because  it  absorbs  an  equi 
valent  portion  of  their  liabilities ;  those  of  their  customers  who  have 
balances  in  their  favor  can  retain  them  in  the  shape  of  deposits, 
and  carry  them  thus  into  the  next  year's  account  or  business. 
Just  as  persons  having  mutual  accounts  settle  their  books,  and 
ascertain  the  balances :  but  instead  of  paying  them,  carry  them 
forward,1  and  merge  them  in  a  new  account. 

The  banks  thus  enable  men  to  carry  their  accounts  on  con 
tinuously  on  their  books,  without  regular  payment  of  all 
balances  in  money ;  the  process  of  setting-off  debts  going  on 
without  interruption,  and  without  the  intervention  of  any  legal 
money,  as  men  continue  their  mutual  dealings  for  years,  with 
out  any  other  payment  than  that  which  is  effected  by  mutual 
accounts. 

We  have  already  intimated  that  the  attention  of  those  desirous 
of  reforming  our  banking  system  has  been  too  exclusively  directed 
to  the  issue  of  bank-notes,  as  if  the  whole  mischief  of  the  system 
proceeded  from  the  abuse  of  that  power.  Even  if  it  were  the 
fact,  that  the  evils  of  the  system  belonged  mainly  to  the  power 
of  issuing  bank-notes,  a  distinction  should  be  made  between 
country  and  city  banks.  The  former  issue  bank-notes  more 
largely,  in  proportion  to  their  capital  and  business,  than  the 
latter.  The  country  banks,  which  rely  for  their  business  and 
profits  upon  their  circulation,  have  more  to  answer  for,  in  refer 
ence  to  the  over-issue  of  bank-notes.  The  legislation  proper  to 
prevent  abuses  of  the  country  banks  might  be  very  injurious  to 
the  system  of  banking  in  the  great  marts  of  industry  and  trade. 
It  is  upon  these  that  depend  mainly  the  steadiness  of  the  cur 
rency,  and  the  firmness  of  credit  throughout  the  country.  The 
failure  of  a  country  bank  to  redeem  its  issues,  and  its  refusal  to 
grant  the  usual  facilities,  have  little  effect  beyond  the  limited 
circle  of  its  business ;  but  when  the  banks  in  the  great  money- 
markets  in  the  large  cities  fail  or  refuse  to  grant  the  usual  bank 
ing  facilities,  the  effects  are  felt  throughout  the  country.  They 
are  financial  centres  ;  their  prosperity  and  their  adversity  both 
radiate  to  \he  circumference ;  they  wield  millions,  where  other 
banks  wield  thousands.  It  is  to  these  powerful  and  influential 


480  CONCENTRATION    OF    PAYMENTS.' 

institutions  that  we  must  look  for  some  of  the  hazardous  aspects 
of  our  banking  system.  They  are  the  heart  and  lungs  of  the 
whole  system,  and  any  disorder  in  them  sends  dismay  and  dan 
ger  through  all  the  members.  Passing  by  the  special  hazards 
of  country  banking  for  the  present,  we  give  our  attention  to  the 
evils  which  specially  beset  the  city  banks,  and  through  them 
inflict  serious  injuries  upon  the  whole  country. 

The  great  commercial  adjustments  or  payments  of  the  United 
States  are  effected  at  the  banks  in  the  chief  cities.  At  least 
one-tenth  in  amount  of  the  whole  occur  at  New  York,  and  in 
proportion  at  New  Orleans,  Boston,  and  intermediate  cities. 
The  movements  of  the  credit  system  tend  strongly  to  a  concen 
tration  of  payments  in  these  cities,  but  especially  in  New  York. 
It  is  found  to  be  economical,  and  otherwise  advantageous,  to 
effect  payments  at  a  point  common  to  as  many  as  possible.  The 
men  of  large  business,  and  the  banks  throughout  the  rest  of  the 
country,  have  their  agents  or  correspondents  in  New  York.  A 
vast  concentration  of  payments  is  accomplished  :  and  where  the 
payments  are  made,  there,  of  course,  the  fund  for  payment  is 
accumulated.  Banks  and  individuals  of  the  interior,  North  and 
South,  East  %  and  West,  make  and  receive  payments  in  New 
York.  Besides  the  great  accumulation  of  funds,  there  is  also, 
of  course,  a  great  concourse  of  borrowers.  The  banks  of  that 
city  report  a  line  of  discounts  exceeding  $100,000,000.  If  this 
runs  off  every  sixty  days,  the  discounts  in  a  year  would  amount 
to  over  $600,000,000  yearly.  These  discounts  of  individual 
paper  yield  an  average  daily  deposit  of  from  $75,000,000  to 
$100,000,000.  We  have,  in  speaking  of  the  amount  of  the 
daily  payments,  shown  with  what  great  effect  these  deposits  are 
wielded;  with  such  success,  that,  with  the  aid  of  only  $6,000,000 
or  $8,000,000  of  circulation,  payments  to  the  daily  amount  of 
$30,000,000  are  accomplished.  These  payments  being  made 
with  a  fund  formed  by  the  discount  of  individual  paper  not 
due,  the  circulation  proceeds  with  a  rapidity  fully  equal  to  any 
possible  change  of  ownership.  It  could  change  hands,  if  the 
demands  of  business  required  it,  every  hour  in  the  day,  or  more 
frequently,  if  needful;  six  times  daily  would,  with  $75,000,000 


PAYMENTS    IN    NEW    YORK.  481 

of  deposits,  pay  $450,000,000.  But  whether  the  payments  each 
day,  in  New  York,  are  $30,000,000  or  $100,000,000,  they  are 
made  in  the  way  we  have  designated.  This  fund,  in  the  shape 
of  deposits  and  circulation,  is  kept  up  by  a  line  of  discounts 
averaging  say  $2,000,000  each  secular  day ;  it  is  extinguished, 
also,  at  the  average  rate  daily  of  $2,000,000  ;  for  the  debtor  in 
every  note  discounted  at  bank  pays  it  by  a  check  upon  that 
fund ;  his  payment  absorbs  and  returns  to  the  bank  an  equi 
valent  amount  of  bank-notes  or  deposits.  For  this  sum  of 
$2,000,000  daily  supplied  by  the  banks  to  the  paying  fund,  the 
banks  engage  to  pay  specie  on  demand  :  the  notes  discounted 
by  them  are  payable  at  an  average  of  sixty  days ;  but  the 
banks,  so  far  as  they  and  the  public  are  concerned,  make  them 
due  at  once.  This  undertaking  of  the  banks  adds  nothing  to  the 
efficiency  of  the  fund,  in  its  function  of  paying  debts ;  for  this 
medium  of  payment  is  always  effective,  so  long  as  persons  are 
willing  to  receive  it.  The  banks  in  New  York  keep  on  hand, 
for  the  purpose  of  facing  this  obligation  to  pay  $100,000,000 
on  demand,  a  sum  of  gold  and  silver  averaging  ordinarily  from 
$10,000,000  to  $15,000,000;  they  do  not  ever  attempt  to  retain 
a  sufficient  amount  to  meet  their  liabilities,  for,  if  they  did,  their 
business  would  not  meet  its  expenses.  They  are,  then,  every 
day  exposed  to  a  demand  for  specie  from  three  to  ten  times 
greater  than  they  can  meet. 

Iif  the  ordinary  course  of  the  domestic  trade  they  would  sel 
dom  be  called  on  for  an  amount  of  gold  or  silver  great  enough  to 
cause  an  alarm,  or  seriously  diminish  their  reserve.  But  New 
York  is  the  point  from  which  shipments  are  chiefly  made  to  pay 
adverse  balances,  and  the  banks  are  especially  exposed  to  a 
demand  for  all  the  gold  required  to  pay  unfavorable  balances 
in  the  foreign  trade.  If  over-trading  has  taken  place,  and  heavy 
balances  are  to  be  paid,  the  proper  penalty  of  over-trailing,  in  the 
shape  of  high  exchange,  should  fall  upon  the  over-traders,  who 
have  to  remit  for  their  adverse  balances ;  but  our  banks  are 
required  to  ward  off  this  penalty,  and  furnish,  for  the  credits 
upon  their  books,  the  whole  amount  needed,  and  that  without 
the  privilege  of  charging  any  premium.  The  dealer  in  bullion 
31 


482  FOOD    FOR    PANIC. 

can  lawfully  demand  a  premium  for  gold  or  silver,  according  to 
the  nature  of  the  demand,  and  the  pressing  necessities  of  the 
buyer.  Every  holder  of  a  coin  can  ask  for  it  any  price  the  exi 
gencies  of  the  buyer  may  compel  him  to  give ;  but  the  banks 
must  part  with  their  coin  at  the  legal  price,  be  the  demand  ever 
so  pressing. 

It  is  not  difficult  to  see  what  abundant  food  for  panic  there  is 
in  such  a  condition  of  things.  Persons  in  the  United  States  have 
claims  to  the  amount  of  $400,000,000  on  the  banks,  payable 
on  demand ;  these  claimants  know  that  the  banks  cannot  pay 
in  specie  the  fifth  part  of  them,  and  often  not  the  tenth  part. 
And  although  the  specie  is  not  what  they  need,  or  would  ever 
have  asked,  yet  they  know  that  the  banks  may  stop  payment  in 
an  hour ;  that  they  will  then  be  branded  as  bankrupt ;  and  that 
they  may  thereupon  be  subjected  to  injurious  and  damaging 
legal  proceedings :  panic  becomes,  therefore,  inevitable.  Men 
in  such  circumstances  feel  themselves  to  be  involved  in  a  wide 
spread,  complicated  calamity.  They  fear  the  result,  not  only 
for  the  amount  of  their  present  deposits,  and  the  bank-notes  they 
hold,  but  they  tremble  for  other  debts  due  to  them,  and  are  in  equal 
dread  abou*  what  they  owe.  They  know  that  if  this  machinery 
of  the  credit  system  is  stopped,  or  seriously  disturbed,  debts 
cannot  be  paid.  The  banks,  under  the  influence  of  a  panic, 
knowing  that  they  can  neither  trust  one  another,  nor  the  unrea 
soning  public,  for  an  hour,  adopt  what  seems  to  them  the*  only 
safe  course ;  they  receive  in  payment  all  their  issues  as  fast  as 
current  payments  return  them,  without,  however,  as  usual,  keep 
ing  up  the  currency  by  fresh  discounts.  If  the  payments  at  the 
banks  amount  in  the  United  States,  for  each  day,  to  $300,000,000, 
the  withdrawal  of  the  usual  facilities  at  the  banks  by  contraction, 
to  the  extent  of  even  one-half,  would  rapidly  absorb  the  stock 
of  bank-notes  and  deposits  applicable  to  current  payments,  and 
of  course  make  these  payments  daily  more  difficult,  and  finally, 
to  a  large  extent,  impossible.  High  interest,  such  as  eighteen, 
twenty-four  or  thirty-six  per  cent,  per  annum,  supervenes  in  this 
hour  of  trial  to  check  still  further  the  circulation  of  that  portion 
of  the  bank-notes  and  deposits  not  absorbed  by  the  banks. 


RESULTS    OF    PANIC.  483 

In  the  fatal  panic  of  a  hundred  days,  which  occurred  in  the 
last  quarter  of  1857,  vast  numbers  of  men  in  business  failed  in 
the  United  States,  and  hundreds  of  millions  were  lost  in  the 
wreck  of  credit,  in  the  depreciation  of  securities  and  of  pro 
perty,  real  and  personal,  besides  hundreds  of  millions  lost  by  the 
check  to  industry,  the  stoppage  of  business,  and  the  cessation 
of  labor.  Millions  of  idle  laborers  lose  millions  of  dollars  daily. 
The  loss  in  a  panic  of  a  hundred  days  is  a  fearful  thing  to  con 
template  in  figures  !  How  much  more  so  the  reality,  if  it  could 
be  brought  at  one  glance  under  the  eye !  The  grave  of  many 
vast  fortunes,  the  gulf  which  has  swallowed  the  competency  of 
thousands,  the  comforts,  the  homes,  the  food  and  raiment  of 
millions  who  toil  with  their  own  hands  for  their  daily  bread ! 

It  is  calamity  like  this  which  opposes  to  the  banking  system 
.  of  Great  Britain  and  the  United  States  a  mass  of  prejudice, 
which  nothing  but  its  real  utility  and  importance  could  with 
stand  for  a  day ;  which  brings  down  upon  it,  from  time  to  time, 
a  load  of  obloquy  enough  to  crush  or  blot  out  any  system  or  in 
stitution  with  which  society  can  at  all  dispense.  The  Bank  of 
England  has,  during  the  whole  period  of  its  existence,  borne  the 
blame  and  odium  of  most  of  the  commercial  revulsions  and  finan 
cial  panics  which  have  visited  Great  Britain.  It  has  had  to  bear 
all  sorts  of  Parliamentary  intervention  and  restriction ;  and  it 
has  been  the  constant  object  of  attack  and  vituperation  on  the 
part  of  journalists,  authors  and  legislators.  The  bank  has 
not  only  lived  through  all  this,  but  in  fact  grows  stronger  from 
year  to  year.  Whilst  it  is  impossible  to  deny  that  there  is 
some  ground  for  all  this  enmity,  and  all  these  objections, 
the  fact  stands  out  obvious  to  all,  that  the  advantages  of  the 
bank  to  the  public  are  such,  that  it  cannot  be  dispensed 
with. 

It  is  the  same  with  the  banking  system  of  the  United  States. 
It  has  borne  enough  of  reproach,  censure,  and  legislative  restric 
tion,  to  have  wholly  repressed,  if  not  destroyed  it,  but  for  the 
evident  fact  that  it  was  a  system  which  the  people  could  not 
surrender  nor  replace.  The  censure  has  been  strong  and  well- 
founded  ;  the  objections  to  the  system,  and  some  of  its  workings, 


484  DEFENCE    OF    THE    BANKS. 

are  well  taken ;  the  prejudices  are  the  result  of  real  mischief. 
The  benefits  of  the  system  have  outweighed  all  this,  and  the 
number  of  the  banks  in  the  United  States  is  growing  rapidly,1 
there  being  now  more  than  four  times  as  many  public  banks  as 
there  were  in  1830.  The  great  increase  of  private  banking- 
houses  of  late  years  proves  that  the  public  banks  had  not  trans 
cended  the  demands  of  business.  The  public  of  the  United 
States  have  decided  unmistakably  not  only  in  favor  of  the  con 
tinuance  of  our  banking  system,  but  in  favor  of  its  enlargement. 
This  decision  has  been  made  against  strong  objection,  great  out 
cry,  and  persevering  opposition.  Upon  the  evidence  of  the  past, 
we  must  conclude  that  our  banking  system  cannot  be  put  down, 
nor  its  progress  wholly  stopped.  There  is,  therefore,  the  more 
reason  that  its  faults  should  be  understood,  and  the  proper  reme 
dies  applied. 

Our  banks  are  so  constituted,  that  when  the  ignorant  and 
alarmed  multitude  commence  a  run  for  coins,  they  have  n,o 
resource  but  to  withdraw  the  usual  facilities  of  banking  from  the 
very  men  of  business  to  whose  custom  they  owe  all  their  profits, 
and  to  whose  forbearance  they  owe  every  day's  existence.  When 
this  race  begins,  the  banks,  whilst  they  are  daily  receiving,  in 
their  own  notes  and  credits  (checks  on  deposits),  the  sums  pay 
able  to  them,  withhold  the  customary  facilities  or  discounts  from 
their  customers,  and  by  this  means  create  such  a  strong  demand 
for  bank-notes  and  credits  for  payment  of  debts,  as  checks  their 
presentation  for  the  specie.  The  stream  of  bank-notes  and  de 
posits  sets  steadily  and  strongly  towards  the  banks,  and  returns 
to  the  public  in  a  constantly  decreasing  volume.  The  demand 
of  the  banks  upon  the  public  may  continue  unabated  for  some 
sixty  days,  in  which  time,  in  a  commercial  community,  the  strin 
gency  may  become  such,  that  few,  if  any,  can  have  bank-notes 
or  credits  upon  which  to  make  demand  for  specie ;  and  those 
who  have  will  be  tempted  by  the  debtors  to  the  banks  to  accept 

1  The  progress  of  banking  in  the  United  States  may  be  seen  in  the  de 
cennial  increase.  In  1782  there  was  1  bank ;  in  1790,  4 ;  in  1800,  28  ;  in 
1810,  80  ;  in  1820,  308 ;  in  1830,  330 ;  in  1840,  907 ;  in  1850,  824 ;  in  1857, 
1400. 


CONTRACTION    IN    THE    PANIC    OF    1857.         485 

at  the  rate  of  twelve,  eighteen,  twenty,  or  thirty  per  cent,  per 
annum;  and  thus  these  bank-notes  and  hank  credits  will  be 
returned  to  the  banks  in  payment  of  debts,  in  place  of  being 
presented  for  payment  in  specie.  The  contraction  in  New  York, 
in  the  panic  of  1857,  is  a  specimen  of  what  the  banks  are  con 
strained  to  do,  to  save  themselves.  They  can  only  protect  their 
coffers  by  refusing  to  issue  the  usual  supply  of  currency.  The 
diminution  of  loans  and  deposits  in  the  banks  of  New  York  stood 
thus  in  August  and  October,  1857  :  — 

Loans.  Deposits. 

15th  of  August. $121,241,472  $92,350,328 

19th  of  September 108,777,421  75,772,774 

17th  of  October. 97,245,826  52,894,023 

This  exhibits  a  reduction  of  discounts,  in  one  month,  of 
$18,000,000,  and  in  the  succeeding  month  of  $11,000,000;  that 
is,  $24,000,000  in  sixty  days :  in  one  month  deposits  ran  down, 
under  this  operation,  $17,000,000;  in  the  succeeding  month, 
$23,000,000;  making,  in  the  two  months,  a  reduction  in  the  chief 
medium  of  payment  of  $40,000,000.  The  deposits  were  thus  re 
duced  nearly  one-half.  It  cannot  be  surprising  that,  under  such  a 
process  of  contraction,  interest  went  up  to  between  fifteen  and 
thirty-six  per  cent.,  and  exchange  down  to  nine  or  ten  per  cent, 
below  par.  What  the  banks  did  in  New  York  was  done,  in  a  greater 
or  less  degree,  in  other  cities ;  bankruptcy,  ruin  and  destruction 
followed.  It  is  estimated  that  from  five  to  six  thousand  failures 
occurred,  involving  an  indebtedness  of  from  $280,000,000  to 
§300,000,000,  with  a  loss  to  creditors  of  more  than  $150,000,000. 
But  this  loss  bears  no  comparison  with  that  arising  from  the  de 
preciation  of  securities,  and  from  the  fall  in  price  of  real  and 
personal  property,  which,  judging  from  the  results  of  estimates 
carefully  made,  cannot  be  less  than  $500,000,000,  and  may  not 
improbably  be  twice  that  sum.  The  loss  sustained  by  the  men 
who  labor  for  their  living  is  even  more  severe  in  its  conse 
quences,  if  not  equal  in  pecuniary  amount.  A  million  of  men 
idle  for  six  months  involves  a  loss  to  the  country  of  $150,000,000, 
besides  the  loss  upon  the  machinery,  shops,  tools  and  factories, 
which  stand  idle  when  the  workmen  are  unemployed. 


486  THE    BANKS    IN    TIME    OF    PANIC. 

The  late  panic  has  inflicted,  in  all  its  bearings  and  ramifica 
tions,  a  loss  upon  the  country  which  may  be  variously  estimated 
from  $500,000,000  to  $1,000,000,000.  No  doubt  the  ill  effects 
of  the  panic  were  much  enhanced  by  the  previous  abuse  of  credit, 
and  that  a  considerable  portion  of  this  devastation  should  be  set 
down  to  that  account.  With  every  allowance  in  that  respect, 
we  shall  have  a  vast  sum  of  loss  to  charge  to  the  panic ;  and 
whether  this  sum  be  $400,000,000,  or  $800,000,000,  matters 
not  to  our  view.  The  loss  was,  to  a  great  extent,  unnecessary, 
cruel,  terrible  —  a  loss  which  has  carried  privation,  distress  and 
ruin  to  a  million  of  homes.  For  a  time,  at  least,  not  yet  passed, 
it  reduced  hundreds  of  thousands  of  the  best  pe'ople  to  a  state 
of  entire  dependence,  if  not  beggary. 

What  was  the  occasion  of  these  dire  calamities  ?  The  banks  of 
the  United  States  had  a  reserve  of  specie  for  several  years  pre 
vious  to  1857,  and  during  the  first  half  of  that  year,  amounting  to 
somewhat  over  $50,000,000;  and  of  this,  the  banks  in  the  city 
of  New  York  held  a  little  more  than  one-fifth.  To  save  this 
amount  of  specie,  the  banks  contracted  the  currency  one-half, 
denied  the  usual  facilities  upon  their  books,  put  up  the  rate  of  in 
terest  from  twelve  to  thirty-six  per  cent.,  put  down  exchange 
upon  England  to  nine  or  ten  per  cent,  below  par,  reduced  the 
revenue  from  customs  to  less  than  half  the  usual  amount,  drew  a 
surplus  of  $20,000,000  of  gold  out  of  the  public  treasury,  and 
drove  the  government  to  an  issue  of  paper  promises  to  pay  its 
current  expenses,  deprived  hundreds  of  thousands,  perhaps 
millions,  of  their  customary  employment,  caused  some  five  or  six 
thousand  failures  among  men  of  business,  and  finally  inflicted  a 
loss  on  the  country,  in  the  depreciation  of  securities,  in  the 
reduction  of  prices  and  by  insolvency,  of  several  hundred 
millions. — Not  to  save  this  sum  of  fifty  millions  from  being  lost, 
sunk  in  the  ocean,  or  thrown  away,  were  all  these  evils  encoun 
tered,  but  merely  to  prevent  it  from  passing  into  circulation 
among  the  people,  or  at  the  worst,  to  prevent  it  from  being  ex 
ported  in  payment  of  debts  due  in  foreign  countries.  Nine- 
tenths  of  the  debts  of  the  country  are  paid,  as  we  have  seen,  by 
the  agency  of  discounts  and  deposits,  with  some  aid  from  the 


WHAT    IS     CALLED    PAYING     SPECIE.  487 

circulation  of  the  banks ;  but  the  banks  have  been  placed  under 
such  heavy  penalties  to  pay  all  their  liabilities  in  specie  on  de 
mand,  that  when  they  are  threatened  with  a  panic,  a  commercial 
revulsion,  or  a  heavy  export  of  specie  to  foreign  countries,  they 
are  compelled,  like  Samson  in  the  temple  of  the  Philistines,  to 
pull  down  the  whole  fabric  of  credit,  public  and  private,  about 
the  ears  of  the  people,  to  disturb  and  check  the  progress  of  in 
dustry  in  all  its  departments,  to  make  bankrupts  of  their  cus 
tomers,  and  to  sow  pauperism  broadcast  in  the  field  of  labor. 

This  compelled  policy  of  the  banks,  under  the  stringency  of 
the  laws  which  govern  them,  has  been  called  paying  specie. 
But  with  how  little  propriety.  Instead  of  paying  their  liabili 
ties  with  commercial  promptness  and  the  faithfulness  of  those 
who  are  discharging  a  legal  and  moral  obligation,  they  resist 
it  with  all  the  power  and  weapons  they  can  command.  In  the 
struggles  incident  to  this  resistance,  they  strike  down  friends  as 
well  as  enemies,  and  deprive  the  public  of  an  amount  of  cur 
rency  necessary  to  business,  ten  times  greater  than  the  specie 
they  are  unwilling  to  pay  out.  And  this  is  the  convertibility 
so  long  aimed  at,  and  to  secure  which  so  much  legislation  and 
so  much  thought  has  been  expended !  This  is  the  triumph  of 
banks  which  pass  through  a  season  of  panic  and  revulsion  with 
out  suspending !  —  a  triumph  like  the  victory  which  leaves 
100,000  dead  bodies  on  the  field  of  battle,  which  makes  10,000 
widows,  50,000  orphans,  and  200,000  paupers ! 

We  have  spent  half  a  century  in  heaping  penalties  upon  the 
banks,  to  enforce  an  honest  and  full  discharge  of  their  pro 
mises  ;  the  performance  consists  in  hurling  back  the  penalties 
upon  the  heads  of  their  customers,  to  disable  them  from  asking  a 
compliance  with  these  engagements.  Among  individual  mer 
chants,  that  would  be  regarded  as  a  very  unsatisfactory  kind  of 
punctuality,  which  consisted  in  keeping  creditors  at  bay,  by  de 
priving  them  of  the  power  of  asking  for  their  dues,  or  by  destroy 
ing  them  so  effectually,  as  to  prevent  all  possibility  of  their 
being  troublesome.  Such,  thus  far,  is  the  achievement  of  legis 
lation  in  reference  to  the  banks.  The  penalties  imposed  are  so 
heavy,  and  the  consequences  of  suspending  specie  payments  so 


488  THE    BANK    SCREW. 

much  dreaded,  that  the  banks  do  not  hesitate  to  use  all  their 
power  over  their  customers,  and  over  the  money-market,  to  save 
themselves :  that  power  involves  a  sacrifice  of  greater  amount 
than  the  whole  capital  of  all  the  banks,  with  all  their  deposits 
and  all  their  specie.  This  power  of  the  banks  has  been  not 
inaptly  called  the  screw :  when  the  banks  become  alarmed  for 
their  own  safety,  they  apply  the  screw  to  the  public,  with  such 
vigor,  as  to  return  with  multiplied  effect  all  the  pressure  and  all 
the  restrictions  which  the  public  has  imposed  upon  them. 

There  is  something  absurdly  and  fatally  preposterous  in  a 
policy  which  loads  the  banks  with  obligations  they  cannot  fulfil, 
which  imposes  penalties  they  cannot  escape,  and  then  allows 
them  to  protect  themselves  by  casting  these  burdens  and 
penalties  upon  the  very  public  for  whose  benefit  they  were  im 
posed.  Whatever  may  be  the  propriety  of  placing  the  banks 
under  the  most  stringent  regulations  against  abuses,  and  under 
the  necessity,  in  all  circumstances,  of  paying  specie,  it  can 
neither  be  expedient  nor  wise  to  make  it  the  interest  of  the 
banks  to  destroy  credit,  and  paralyze  industry,  for  their  own 
protection.  The  people  who  force  their  banks  to  pay  their  issues 
on  demand,  under  such  imperfect  regulations,  do  so,  as  we  have 
seen  in  the  panic  of  185T,  at  a' cost  tenfold  the  amount  of  specie 
involved.  Under  such  provisions,  the  banks  at  times  must  sus 
pend,  or  the  people  must  bear  a  pecuniary  depletion  fearful  to 
contemplate. 

In  every  struggle  between  the  public  and  the  banks,  the  pub 
lic  has  had  the  worst  of  it.  Banks  may  be  destroyed;  but, 
under  their  present  constitution,  their  downfall  involves  greater 
mischiefs,  and  more  destruction  of  capital,  than  many  times  the 
value  of  their  corporate  interests. 


BANKS    INTENDED    TO    BE    A    PUBLIC    BENEFIT.    489 


$  4.  Banks  intended  to  be  a  public  benefit,  not  a  public  evil  —  Public 
right  to  the  facilities  afforded  by  banks  —  Contractions  of  the  cur 
rency,  and  results  —  Remedies  —  Discounts,  proceeds  payable  ot  a  future 
day  in  money,  but  receivable  at  all  times  for  debts  to  the  banks  —  Deposits 
legally  payable  at  a  future  day,  but  receivable  in  bank  at  all  times  for 
debts  —  Bank-notes  payable  at  a  day  future,  but  receivable  for  debts  — 
—  Long  credits  an  element  of  disturbance  in  the  credit  system  —  Diver 
sion  of  the  funds  of  the  credit  system  from  their  proper  channel —  Credit 
currency  should  be  so  marked  as  to  be  known  —  Country  banks  —  Their 
business  of  a  different  nature  —  Present  banking  system  not  adapted  to  it. 

It  cannot  be  doubted,  in  view  of  all  this,  that  some  change  is 
needful  in  the  very  constitution  of  our  banks ;  the  payment  of 
specie,  in  the  mode  in  which  it  has  been  enjoined,  cannot 
be  enforced  but  at  a  cost  which  should  never  be  encountered. 
If  the  banks  are  rightly  placed  under  these  obligations,  their 
compliance  should  be  full  and  free,  without  reservation  or  eva 
sion,  but  especially  should  it  be  without  any  retaliatory  measures 
against  the  public :  if  they  are  tolerated  or  encouraged  as  use 
ful  institutions,  they  should  not  be  permitted  to  wield,  for  their 
protection,  a  power  so  irresistible,  and  a  weapon  so  destructive. 
Having  received  their  charters,  in  good  part,  upon  public  con 
siderations  ;  having  offered  to  the  public  certain  banking  facili 
ties  and  conveniences ;  having  drawn  from  its  previous  channels 
certain  portions  of  business,  and  the  custom  of  large  numbers 
of  men  in  trade  or  manufactures,  no  sudden  withdrawal  of  these 
facilities,  no  hasty  desertion  of  their  customers,  should  be  en 
dured,  much  less  a  policy  more  destructive  than  civil  war, 
famine  or  conflagration. 

The  banks  commenced  their  business,  with  the  avowed  purpose 
of  serving  the  public,  as  well  as  making  dividends  for  their 
stockholders.  The  business  thus  undertaken  concentrates  in  the 
channels  formed  for  it,  and  flows  on  with  a  steadiness  propor 
tioned  to  the  regular  progress  of  trade  and  industry.  The 
facility  afforded  by  the  banks  is  very  great,  and  their  compen 
sation  is  ample.  Having  assumed  this  position,  they  have 
given  the  public  a  title  to  the  facilities  of  banking,  for  upon  no 
other  ground  would  their  corporate  existence  have  been  con- 


490     THE    RIGHT    TO    FACILITIES    OF    BANKING. 

ceded ;  the  public  have  a  right  to  their  discreet  and  well-ordered 
continuance. 

It  could  never  have  been  within  the  contemplation  of  legis 
lators,  that  banks  might,  at  their  pleasure,  arbitrarily  discon 
tinue  their  functions,  and  refuse  to  be  the  medium  of  commer 
cial  payments  ;  and  while  they  were  exacting  fulfilment  of  every 
obligation,  on  the  part  of  their  customers,  deny  to  them  altoge 
ther  the  usual  means  of  meeting  their  payments.  It  certainly 
never  could  have  been  intended,  when  the  obligation  to  pay 
specie  was  imposed  upon  the  banks,  that  this  obligation  should 
be  accepted  as  a  condition  of  their  charters,  but  with  the  liberty 
of  denying  to  the  public  the  very  facilities  that  banks  can  best 
furnish.  The  community  in  which  banks  are  situated  have  a 
right  to  expect  that  they  will  continue  the  business  of  banking 
with  a  reasonable  degree  of  consistency  and  steadiness.  This 
function  is  too  important  to  be  the  subject  of  starts  and  stops,  or 
any  unnecessary  variations.  Its  progress  should  keep  pace 
with  the  business  of  the  time.  The  institution  which  obtains  a 
charter  to  carry  on  the  business  of  banking,  which  afterwards 
secures  a  large  number  of  customers,  with  whom,  of  course,  a 
still  larger  circle  of  business  men  are  connected,  and  then,  with 
out  sufficient  reason,  suddenly  shuts  its  books  and  refuses  to  con 
tinue  business  in  the  regular  and  accustomed  manner,  commits 
an  offence  not  less  grave  in  its  nature,  and  much  worse  in  its 
results,  than  that  of  suspending  specie  payments. 

In  the  regular  progress  of  industry  and  trade,  new  business- 
paper  is  constantly  made,  and  as  constantly  finds  its  way  to  the 
banks ;  while  that  which  has  been  discounted  matures  and  is 
paid,  the  new  paper  is  offered  for  discount,  by  which  the  depo 
sits,  as  they  are  paid  to  the  banks,  are  replenished  and  kept  up 
in  amount.  A  contraction  cuts  off  the  supply  of  discounts  and 
deposits ;  and  whilst  the  notes  of  individuals  are  maturing,  they 
are  suddenly  denied  the  usual,  and  indeed  the  only,  means  of 
paying  them.  They  may  be  making  their  average  sales,  and 
receiving  the  usual  paper ;  but  the  banks,  in  a  state  of  contrac 
tion,  refuse  new  issues,  though  they  exact  punctual  payments. 
A  firm  doing  business  to  the  extent  of  $400,000  yearly,  has 


EFFECTS    OF    CURRENCY    CONTRACTIONS.      491 

payments  to  make,  averaging  over  $1000  each  day.  A  severe 
contraction  by  the  banks  may  ruin  such  a  firm  in  a  month ;  that 
is,  if  the  banks,  during  one  month,  withhold  the  usual  facilities 
to  the  extent  of  only  $15,000,  it  may  stop  the  firm,  and  inflict 
upon  it  a  loss  of  $100,000,  or  more,  and  other  injuries  wholly 
irreparable.  When  the  bank  screw  is  on,  it  bears  upon  all  who 
have  large  payments  to  make  ;  the  scarcity  is  felt  by  all,  and  of 
course  mutual  assistance  to  any  large  extent  is  out  of  the  ques 
tion,  and  the  resort  to  advanced  rates  of  interest  becomes  inevi 
table.  So,  when  the  banks  of  the  United  States  have  a  line 
of  discounts  amounting  to  $600,000,000,  a  contraction  of 
$50,000,000,  or  $100,000,000,  in  a  month,  may  cause  thou 
sands  of  men  to  stop  payment,  with  a  damage  of  hundreds  of 
millions,  besides  accompanying  mischiefs  and  evils,  such  as  we 
have  before  indicated.  A  suspension  on  the  part  of  the  banks, 
however  carefully  it  should  be  guarded  against  and  avoided,  and 
whatever  inconveniences  and  losses  it  may  involve,  is  an  evil 
which  cannot  for  a  moment  be  weighed  against  the  calamity  of 
a  contraction.  A  suspension  may  or  may  not  be  a  serious 
evil :  it  may  last  for  days,  or  weeks,  or  years,  or  even  for  a 
quarter  of  a  century,  as  did  that  of  the  Bank  of  England  from 
1797  to  1822,  with  more  or  less  damage  to  the  banks,  and  injury 
to  the  currency.  A  contraction  by  the  banks,  if  severe,  or 
amounting  to  only  fifty  per  cent,  of  their  usual  discounts,  will  in 
a  week  create  distress  and  panic ;  in  a  fortnight,  inflict  bank 
ruptcy  and  ruin  upon  multitudes ;  in  a  month,  wide-spread  in 
solvency,  destruction  of  credit,  a  ruinous  fall  of  prices,  a  para 
lysis  of  industry  and  trade,  ^ith  all  the  train  of  starving  multi 
tudes,  crowded  almshouses,  and  overflowing  prisons.  But  in 
dealing  with  the  banks,  our  legislators  have  forsaken  the  old 
adage,  u  of  two  evils,  choose  the  least;"  they  have  spent  their 
whole  ingenuity  in  devising  means  to  enforce  the  uninterrupted 
payment  of  specie,  leaving  the  banks  at  full  liberty  to  inflict 
upon  the  public  all  the  evils  of  a  contraction,  as  the  only  means 
of  avoiding  the  disgrace  of  a  suspension.  No  greater  or  more 
fatal  mistake  could  have  been  committed ;  the  results  of  this 
error  in  legislation  can  perhaps  never  be  estimated.  The  his- 


492  REMEDIES    AGAINST    CONTRACTIONS. 

tory  of  banking  proves,  beyond  question,  that  most  of  the  mis 
chiefs  which  have  proceeded  from  the  system  have  been  caused 
by  irregular  action  on  the  part  of  the  banks,  but  more  especially 
by  rapid  contraction  in  the  face  of  a  demand  for  specie.  Expe 
rience  has  taught  us,  too,  that  all  this  legislation,  and  all  these 
sufferings,  are  insufficient  to  secure  the  continued  convertibility 
of  bank  liabilities. 

We  are  forced  to  the  conclusion,  then,  that  there  should  be  legal 
provisions  against  undue  contraction,  not  less  stringent  than  those 
against  suspension.  The  former  being,  indeed,  immeasurably 
the  greater  evil,  demands  proportionable  care  on  the  part  of  the 
public  authorities.  It  may  be  thought  that  the  evil  is  without 
remedy.  The  analysis  of  the  processes  of  banking  already  pre 
sented,  encourage  us  to  believe  that  it  is  much  less  difficult  to 
prevent  needless  contractions  by  the  banks,  than  to  secure  the 
payment  of  $500,000,000  of  liabilities  with  $50,000,000  of 
specie. 

We  know,  by  observation  of  the  business  of  banks  and  their 
customers,  that  it  is  not  specie  these  customers  most  need.  The 
man  who  has  $20,000  of  his  notes  maturing  in  June,  may  in  ad 
vance  ask  the  bank  which  is  the  holder  of  these  notes  for  a  dis 
count  of  notes  held  by  him  for  that  sum,  payable  in  October.  He 
does  not  ask  for  gold  or  silver,  or  for  bank-notes ;  he  merely 
wishes  a  credit  oh  the  books  of  the  bank,  upon  which  he  can 
draw  for  the  amount  of  his  notes  as  they  mature.  He  knows 
this  is  the  business  in  which  the  bank  is  chiefly  engaged,  and 
that  more  than  nine-tenths  of  the  payments  made  to  the  bank 
are  made  by  checks  on  it,  or  some  other  bank :  he  therefore 
neither  needs  nor  thinks  of  specie  in  reference  to  his  payment 
of  $20,000.  He  may  owe  the  banks  $100,000  upon  notes  which 
will  mature  in  three,  four  or  six  months,  and  hold  the  paper  of 
others  sufficient  to  pay  the  whole  amount,  provided  he  can  have 
the  needful  facility  for  applying  it.  For  this  class  of  customers, 
who  have  to  pay  in  bank  from  $5000  to  $50,000  a  month,  it  is 
proper  that  some  legal  provision  should  be  made  against  the 
capricious  use  of  power  by  the  banks.  It  is  against  these  that 
the  power  of  contraction  is  exercised  with  such  fatal  results  ; 


DEPOSITS  PAYABLE  AT  FUTURE  DAY.    493 

they  are  the  chief  business  men  of  every  community,  and  as 
such  entitled  to  any  protection  wise  foresight  can  provide. 

The  banks,  therefore,  should  be  authorized  and  required  to  open 
accounts  with  such  of  their  customers  as  may  desire  it  for  the 
mere  purposes  of  adjustment :  that  is,  when  a  man  offers  a  note, 
having  four  months  to  run,  at  a  bank  for  discount,  the  proceeds 
in  this  new  account  to  be  placed  on  the  books  of  the  bank  to  his 
credit,  payable  in  lawful  money  of  the  United  States  on  the  day 
when  the  discounted  note  matures,  but  receivable  by  the  bank 
at  all  times  in  satisfaction  of  any  debt  payable  at  the  bank.  The 
bank  would  thus  give  for  discounted  paper,  not  money,  but  a 
credit  on  its  books,  payable  in  money  as  soon  as  the  paper  dis 
counted  is  payable.  The  advantage  to  the  customer  is,  that  he 
receives  at  once  funds  to  pay  his  debts  in  bank  —  funds  divisi 
ble  to  the  minutest  fraction,  convenient,  safe  and  manageable. 
This  is  just  what  the  man  of  business  wants ;  his  personal  credit 
enables  him  to  purchase  on  time,  for  his  own  paper,  whatever 
his  business  requires.  He  gives  the  same  advantage  he  enjoys 
to  those  who  purchase  from  him ;  and  the  bank  completes  the 
transaction,  by  enabling  its  customer  thus  to  pay  his  notes  with 
the  notes  of  others.  In  this  part  of  their  business,  the  banks  would 
be  dealing  with  their  customers  in  credits,  in  a  manner  agreed 
upon  beforehand,  and  mutually  advantageous.  They  would  then 
be  authorized  to  open  two  accounts  with  every  customer  who 
desired  it  —  one  for  money,  and  one  for  credit.  The  depo 
sitor  of  money  would,  upon  a  special  book,  and  with  a  special 
form  of  check,  be  always  able  to  draw  money  or  transfer  it. 
Upon  a  credit  account,  the  depositor  could  only  draw  the  same 
kind  of  funds  he  deposited;  but  his  deposit  would  at  all  times  be 
applicable  to  payment  of  any  debt  to  the  bank.  Applications 
for  discount  would  state  whether  the  amount  was  needed  in 
money,  in  bank-notes,  or  in  a  credit  on  the  books  of  the  bank. 
If  granted  in  money,  it  would  be  paid  in  money;  but  if  in  credit, 
the  proceeds  of  the  discounted  paper  would  be  credited  accord 
ingly,  and  entered  as  a  deposit  applicable  to  all  payments  to  the 
bank,  but  payable  in  specie  only  on  the  maturity  of  the  paper 
discounted.  The  banks,  by  agreement,  receive  all  deposits  upon 


494         DEPOSITS    WHEN    PAYABLE    IN    SPECIE. 

the  condition  of  their  being  repayable  in  coins  in  sixty  or  ninety 
days,  but  receivable  for  any  debt  due  the  bank  immediately,  and 
at  all  times. 

In  this  way  a  bank  would  only  lend  money  when  it  had  money 
to  lend  ;  and  it  could  lend  credit  at  all  times,  upon  good  notes, 
to  any  amount,  because  it  would  only  become  liable  to  pay  in 
gold  when  the  paper  discounted  matured.  In  this  part  of  its 
business,  a  bank  would  have  claims  upon  its  customers  for  the 
same  amount,  and  payable  at  the  same  time,  as  the  claims  of  the 
public  upon  the  bank.  In  other  words,  a  bank  would  hold  the 
notes  of  individuals  for,  say  $100,000,  payable  on  the  average 
of  two  months,  for  which  it  gave  credits  on  its  books  to  the 
amount  of  $99,000,  payable  in  specie  pari  passu  with  the  matu 
rity  of  the  discounted  paper.  The  debtors  of  the  $100,000  must 
pay  the  bank,  in  the  progress  of  the  two  months,  $100,000,  or 
$1000  in  money,  with  $99,000  of  bank  credits.  The  latter  is,  of 
course,  the  currency  in  which  the  bank  is  paid ;  and  it  is  this 
last  process  which  it  is  important  to  separate  from  transactions 
in  money,  that  it  may  not  be  interrupted  or  deranged  by  every 
fluctuation  in  the  demand  for  money.  It  is  one  of  the  processes 
of  the  credit  system,  the  magnitude  and  importance  of  which  is 
far  beyond  any  use  of  the  precious  metals. 

But  whilst  it  is  quite  practicable  and  proper  that  the  banks 
should  be  bound  to  keep  this  process  by  special  accounts  with 
their  customers  open  for  the  purpose  of  adjusting  debts,  it  is 
evident  that  although  bank-notes  are  employed  in  the  same 
way,  and  are  applicable  to  the  same  uses,  yet  their  use  cannot 
be  left  to  any  private  management  between  the  banks  and  their 
customers.  The  employment  of  bank  deposits  or  credits  is  con 
fined  chiefly  to  the  narrow  circle  of  bank  depositors  and  dealers 
in  securities ;  but  bank-notes  take  a  wide  range  of  circulation, 
in  very  subdivided  amounts.  Their  proper  tendency  is  always 
to  the  bank  which  issues  them ;  its  notes  and  deposits  are  the 
proper  fund  to  pay  debts  to  a  bank,  and  are  of  course  eagerly 
sought  for  by  all  its  debtors.  So  wide  is  their  track  of  move 
ment,  and  so  undoubted  their  usefulness,  that  every  precaution 
should  be  taken  to  protect,  not  only  the  holders  of  the  notes, 


BANK-NOTES    AND    TIME    PAPER.  495 

but  to  uphold  the  confidence  of  the  public  in  a  security  which, 
if  wisely  and  skilfully  managed,  can  be  made  to  perform  so  suc 
cessfully  Jhe  functions  of  money.  The  economy  of  employing 
bank-notes,  so  far  as  they  are  applicable  as  substitutes  for 
money,  furnishes  additional  motives  to  guard  against  all  prac 
tices  or  abuses  which  may  bring  discredit  upon  them. 

In  strictness,  bank-notes  should  not  be  issued,  payable  on  de 
mand,  in  exchange  for  individual  notes  payable  at  a  subsequent 
day,  for  the  reason  we  have  urged,  that  such  a  promise  on  the 
part  of  the  banks  is  delusive ;  they  cannot  fulfil  it,  if  required. 
It  is  mnde  in  the  confidence,  not  of  performance,  but  of  forbear 
ance.  The  public,  in  this  respect,  cannot  rely  upon  the  bank, 
nor  the  latter  upon  the  forbearance  of  the  public.  Bank-notes 
issued  in  exchange  for  individual  paper  at  four  months,  and  the 
same  with  notes  of  shorter  date,  should  in  strictness  be  issued 
at  four  months,  so  far  as  it  regards  payment  in  specie ;  but 
receivable  immediately,  and  at  all  times,  in  discharge  of  any 
debts  payable  at  the  bank.  The  banks  might  safely  issue  their 
notes  in  this  £orm,  and  be  ready  to  meet  them  when  due,  or  at 
any  time  afterwards ;  in  this  form,  with  the  security  of  public 
stocks,  with  ample  margin,  they  would  become  as  safe  a  cur 
rency  as  has  ever  been  devised,  and  as  free  from  fluctuation. 

The  inconvenience  of  making  every  bank-note  payable  in 
specie  on  a  day  corresponding  with  the  maturity  of  the  dis 
counted  paper  on  which  it  is  issued,  would  involve  some  trouble 
and  expense ;  but  it  is  very  certain  the  ingenuity  of  bankers  and 
engravers  could  overcome  this  difficulty.  Bank-notes  payable 
on  demand  should  never  be  issued,  beyond  the  amount  of 
specie  actually  in  the  bank.  Bank-notes  payable  at  a  future 
day  should  only  be  received  on  deposit  in  the  credit  accounts, 
where  they  would  be  applicable  to  all  the  usual  purposes  of  pay 
ment,  without  being  convertible  on  demand.  Deposits  not  actu 
ally  made  in  coins  or  bullion,  should  by  contract  be  legally 
payable  say  in  sixty  or  ninety  days  from  the  date  of  the  deposit, 
but  be  receivable,  in  the  meantime,  for  debts  in  bank.  With 
such  regulations,  the  banks  would  never  be  under  the  necessity 
of  enforcing  any  ruinous  contraction  of  the  currency,  for  their 


496  THEORY    OF    CONVERTIBILITY, 

issues  would  return  at  the  same  rate  as  their  liabilities  to  pay 
specie  would  accrue.  They  could  continue  to  issue  the  average 
sura  of  currency,  without  hazard,  as  it  would  expose  them  to  no 
instant  demand ;  they  could  save  their  customers  in  a  commer 
cial  crisis,  and  thereby  stay  the  diasters  of  a  contraction,  which 
is  one  of  the  most  direful  evils  of  modern  times. 

The  income  of  the  banks  would  be  in  their  own  issues,  or  in 
money ;  that  portion  not  received  in  their  own  issues  would  be 
received  in  money,  or  in  some  currency  fully  satisfactory.  If 
the  regular  course  of  payment  into  the  banks  did  not  return 
their  own  issues  in  full,  they  would  be  subject  to  a  demand  for 
specie  for  all  that  might  remain  outstanding :  and  this  should  be 
a  sufficient  stimulus  to  watchfulness  and  caution  in  their  busi 
ness,  both  in  the  matter  of  issuing  their  own  currency,  and 
receiving  that  of  others.  They  could  then  pay  every  demand 
for  specie  without  any  necessity  for  contraction,  and  they  should 
be  held  to  it  by  ample  securities  deposited  for  that  purpose,  with 
the  penalty  of  a  high  rate  of  interest  for  any  delay.  Let  the 
banks  have  ample  opportunity  to  be  useful  to  their  stockholders 
and  to  the  public ;  let  their  engagements  be  only  such  as,  with 
proper  care  and  skill,  they  can  perform ;  and  then  let  faithful 
performance  be  rigidly  exacted.  Let  them  have  no  power  to 
oppress  a  whole  country,  in  the  mere  effort  to  save  themselves 
from  a  temporary  suspension.  Let  not  specie  payments  consist 
in  making  a  famine,  in  place  of  offering  a  feast. 

It  is  a  frequent  subject  of  remark  and  complaint,  that  in  some 
departments  of  business  the  credits  upon  sales  are  too  prolonged. 
There  is,  it  is  well  known,  much  abuse  of  the  credit  system  in 
that  way.  Industry,  as  well  as  climate,  has  its  seasons  and  its 
yearly  cycle.  It  counts  its  achievements  and  its  gains  by  the 
year.  The  consumption  of  the  annual  products  of  industry  has 
its  regular  stages,  and  its  yearly  completion.  The  distribution 
of  trade  is  governed  by  the  order  of  consumption.  The  time 
given  upon  sales  should  be  controlled  by  the  same  rule ;  credits 
should  not  be  prolonged  for  a  year,  but  should  be  governed  by 
the  progress  of  consumption.  That  which  is  consumed  should 
be  paid  for,  and  that  which  cannot  be  consumed  should  not  be 


LONG    CREDITS.  497 

represented  by  paper  in  the  processes  of  the  credit  system,  in 
any  of  its  agencies.  The  credit  system  is  one  of  pure  adjust 
ment.  It  adjusts  the  accounts  between  labor  and  labor,  commo 
dities  and  commodities,  capital  and  capital,  and  between  all 
these  as  variously  commingled  and  the  persons  who  control 
them,  where  the  circle  of  movement  has  been  completed ;  com 
modities  for  which  no  debt  has  accrued,  and  no  paper  has  been 
issued,  are  not  yet  items  in  the  accounts  of  the  credit  system. 
Long  credits  do  not  fully  change  this  condition,  but  only  intro 
duce  complications  and  confusion. 

To  trace  all  the  mischiefs  of  prolonged  credits,  given  rather 
as  a  temptation  to  the  purchaser  than  as  any  facility  to  the  pro 
gress  of  consumption,  would  well  repay  the  trouble,  but  might 
lead  us  out  of  our  path.  We  can  only  make  a  remark  in  refer 
ence  to  their  effects  upon  banking.  We  have  seen  that  one  of 
the  chief  advantages  afforded  by  the  banks  is  the  facility  they 
afford  to  men  in  business,  of  applying  their  credits  to  pay  their 
debts ;  the  paper  which  they  take  being  discounted  and  applied 
to  the  payment  of  that  which  they  give.  In  doing  this,  the 
banks  act  as  agents  of  both  parties,  debtors  and  creditors,  be 
cause  collectively  they  are  but  one  party  —  all  are  debtors,  and 
all  are  creditor.  The  power  of  the  banks  in  this  agency  de 
pends,  in  no  small  degree,  upon  whether  the  maturity  of  the 
discounted  paper  does  not  fall  too  widely  apart.  As  a  general 
thing,  persons  who  give  notes  in  the  progress  of  their  transac 
tions,  payable  at  a  future  day,  endeavor  to  take  the  notes  of 
those  with  whom  they  deal,  payable  at  times  not  too  far  off  to  be 
applicable,  by  aid  of  the  banks,  in  discharge  of  their  own  paper. 
If  a  portion  of  the  customers  of  a  bank  should  give  their  notes 
at  four  months,  and  take  the  notes  of  others  at  eight  or  twelve 
months,  the  banks  would  properly  hesitate  to  discount  the  long 
paper.  When  the  notes  given  by  a  merchant  mature  within  one, 
two  or  three  months  of  those  which  he  takes,  the  banks  can 
stand  between  the  parties  for  this  short  time  without  risk ;  and 
allow  the  customer  whose  notes  mature  in  March  to  pay  them 
with  the  proceeds  of  notes  payable  in  June.  The  notes  of  the 
bank  issued  in  March,  or  the  credit  given  on  its  books  at  that 
32 


498  DISCOUNTS    OF    LONG    PAPER. 

time,  being  payable  in  specie  on  demand,  the  bank  is  exposed, 
from  March  till  June,  to  a  demand  for  the  amount  of  its  notes 
or  credits,  at  the  pleasure  of  the  holders.  This  is  qualified,  how 
ever,  by  the  demand  for  the  notes  or  credits  on  the  part  of  the 
debtors  who  must  be  prepared,  in  June,  to  lift  their  notes,  by 
returning  in  full  the  issues  of  the  bank,  or  the  money  in  their 
place.  The  shortness  of  the  time  between  March  and  June 
begets  an  active  demand  for  these  issues,  which  not  only  sus 
tains  their  value,  but  their  circulation.  In  the  case  supposed, 
they  are  all  required  to  pay  the  notes  maturing  in  June ;  but 
being  receivable  for  all  debts  due  to  the  bank  in  the  mean  time, 
the  demand  is  constant  and  efficient.  But  if  we  suppose  the 
merchant  whose  notes  mature  in  March,  has  taken  notes  pay 
able  in  the  following  December,  and  that  he  pays  the  bank  with 
the  proceeds  of  these  long  notes,  the  bank  must  be  exposed  to  a 
demand  for  specie  for  its  issues  upon  this  long  paper  for  nine 
months :  besides,  the  drawers  of  the  notes  payable  in  December 
are  under  no  strong  pressure  to  obtain  the  issues  of  the  bank 
for  a  payment  so  remote.  One  of  the  chief  elements  which  sus 
tains  and  makes  active  a  bank  circulation  is  thus  removed.  A 
single  instance  of  the  discount  of  long  paper  is  of  course  of  little 
account ;  but  if  long  credits  become  common,  and  the  banks  dis 
count  the  paper  to  such  an  extent  that  a  considerable  portion 
of  their  issues  or  liabilities  rests  upon  it  whilst  they  are  under 
obligation  to  pay  on  demand  the  very  amounts  thus  issued, 
they  must  wait  six  or  nine  months  to  be  reimbursed.  The 
liability  incurred  by  the  banks  is  the  same,  whether  the  paper 
discounted  is  long  or  short,  for  it  is  immediate ;  whilst  the  liabi 
lities  of  the  debtors  is  only  at  the  maturity  of  the  long  paper. 
This  not  only  materially  lessens  the  demand  for  the  issues  of  the 
banks,  but  tends  to  diminish  their  value,  power  and  usefulness 
as  a  substitute  for  money.  Not  being  in  brisk  or  urgent  de 
mand  for  the  legitimate  purpose  of  payment  to  the  banks,  they 
would  run  into  other  channels ;  and  the  banks  would  be  com 
pelled  to  pay  them  long  before  they  could  receive  payment  of  the 
paper  on  which  they  were  issued. 

The  banks  being  merely  dealers  in  credit,  cannot  safely  dis- 


LONG    CREDITS    AND    THE    CREDIT    SYSTEM.      499 

count  paper  which  soon  results  in  a  loan  of  money.  They  have 
not  the  money,  and  therefore  the  policy  would  be  ruinous. 
That  active  demand  for  bank-notes,  or  bank  funds,  which  best 
keeps  them  in  good  credit,  and  supports  their  circulation,  can 
only  be  secured  by  a  strong  current  setting  towards  the  banks 
in  payment  of  debts.  The  more  rapidly  the  banks  absorb  their 
issues,  the  more  confidence  they  inspire  in  the  public.  The  banks, 
therefore,  which  are  dealing  in  paper  having  an  average  time  of 
three  months,  may  prosper  and  be  extremely  efficient ;  whilst 
those  which  deal  in  paper  averaging  six  months  may  not  only 
fail  of  being  useful,  but  be  speedily  and  utterly  ruined.  When 
credits  are  short,  the  whole  adjustment  is  soon  completed: 
credits  and  debts  meet  on  the  books  of  the  bank  and  extinguish 
each  other :  the  debts  are  paid,  the  debtors  are  acquitted,  the 
liabilities  of  the  banks  are  absorbed,  and  the  risk  is  over.  When 
the  credits  are  long,  the  process  of  absorption  by  the  bank  is 
slow,  the  circulation  is  languid,  the  parties  to  the  paper  remain 
longer  liable,  and  the  risk  of  the  banks  is  greatly  increased. 

The  mischiefs  of  long  credits,  even  so  far  as  banks  are  con 
cerned,  are  not  confined  to  the  cases  where  such  paper  is  dis 
counted  by  them.  The  banks  are  so  largely  interested  in  the 
movements  of  credit,  that  any  irregularity  in  the  general  system 
soon  reaches  them.  The  adjustments  of  the  credit  system  con 
template  not  the  evasion  or  postponement  of  payment,  but  actual 
set-off  and  final  payment.  If  a  hundred  tons  of  iron  are  sold 
six  times  in  a  year,  each  time  at  a  credit  of  two  months,  for 
$3000,  the  notes  taken  by  the  persons  selling  furnish,  through 
the  banks,  the  means  of  paying  all  without  risk ;  for  no  one  is 
liable  longer  than  two  months :  but  if  one  of  the  intermediate 
sales  is  at  eight  months,  a  link  in  this  chain  of  credit  is,  if  not 
broken,  so  drawn  out,  as  to  interrupt  the  progress  of  adjust 
ment.  With  the  short  credits,  the  notes  furnished  the  means 
of  payment;  but  the  long  credit  stops  the  process.  The  long 
note  can  furnish  no  facility  for  paying  the  note  preceding  it  in 
order,  and  it  must  be  paid  in  money,  or  from  other  resources. 
Long  credits,  therefore,  interrupt  the  regular  order  of  payment : 
and  even  if  the  proportion  of  these  long  credits  do  not  exceed 


500          MISAPPLICATION    OF    CBEDIT    FUNDS. 

ten  per  cent,  of  the  whole,  the  effects  of  the  interruption  may 
extend  with  bad  results  throughout  the  whole  of  the  vast  opera 
tions  of  the  credit  system,  and  be  distinctly  felt  and  perceived 
by  the  banks.  Long  credits  are,  then,  not  only  violations  of  the 
proper  laws  of  trade,  but  they  are  a  dangerous  interference  with 
the  safe  working  of  the  credit  system. 

Another  abuse  of  the  credit  system  deserves  more  attention 
than  it  has  received  —  the  misapplication  of  funds  which  spe 
cially  belong  to  the  regular  processes  of  adjustment,  by  turning 
them  aside  to  other  channels  of  business,  in  which  they  are  em 
ployed  and  treated  as  money.  It  is  a  very  evident  proposition, 
that  all  the  debts  and  all  the  credits  are  equal,  as  they  are  but 
counterparts ;  whatever  is  the  debt  of  one  man,  is  the  credit  of 
another :  it  is  equally  evident,  then,  that,  in  a  direct  adjustment, 
it  would  require  all  the  credits  to  pay  all  the  debts.  The  only 
reason  why  the  debts,  in  every  mode  of  payment,  do  not  absorb 
all  the  credits  is,  that  the  circulation  given  by  the  banks  to  a 
portion  of  the  credits  reduces  the  amount  necessary  to  pay  the 
debts.  It  is  still  true,  however,  that  the  proper  application  of 
the  credits,  in  the  working  of  the  credit  system,  is  to  pay  the 
,  debts,  so  far,  at  least,  that  every  man  shall  have  the  opportunity 
and  be  held  to  avail  himself  of  it,  to  apply  what  is  payable  to 
him  in  payment  of  what  he  owes  to  others.  If  credits  are  largely 
diverted  from  this,  their  legitimate  channel,  the  result  must  be 
severe  pressure  in  some  quarter  for  means  of  payment.  We 
have  seen  that  the  fund  by  means  of  wrhich  the  chief  payments 
of  industry  and  trade  are  made,  is  formed  by  the  discount  of  the 
securities  created  in  that  business.  If,  when  this  fund  is  formed 
by  the  action  of  the  banks,  it  is  used  for  other  purposes  —  if  it 
is  employed  in  the  purchase  of  real  estate,  in  the  erection  of 
buildings,  or  in  the  construction  of  railroads  —  it  is  withdrawn 
from  its  proper  channel,  which  was  to  follow  in  the  track  of  the 
business  out  of  which  it  originated,  and  to  make  the  payments 
accruing  upon  those  transactions. 

If  we  could  bring  into  one  view  all  the  debts  to  be  paid, 
:and  see  at  the  same  time  the  position  of  the  credits  applicable 
,to  the  payment,  we  should  perceive  at  once  the  danger  and  the 


THE  CREDITS  REQUIRED  TO  PAY  THE  DEBTS.  501 

evil  of  perverting  these  credits  from  a  disposition  so  appropriate 
for  individuals,  and  so  necessary  in  an  industrial  and  commer 
cial  point  of  view.  The  whole  public  are  deeply  interested  in 
the  faithful  progress  of  these  payments.  It  is,  however,  mainly 
a  work  of  individuals.  Neither  the  public  authorities,  nor  the 
banks,  can  apply  the  credits,  or  pay  the  debts.  The  whole 
process  is  one  of  individual  effort ;  the  banks  are  passive  agents, 
and  merely  furnish  the  means  of  adjustment.  If  credits  have 
been  short,  the  paying  of  the  discounted  paper  will  create  such 
a  demand  for  the  issues  of  the  banks,  that  there  will  be  little 
danger  of  any  misapplication  or  perversion.  Individual  debtors 
find  that  all  their  means,  arid  all  their  activity,  are  required,  to 
keep  pace  with  the  rapidly  maturing  paper.  1%  however,  mo 
tives  more  strong  intervene,  such  as  a  rage  of  speculation ;  if 
debts  are  extensively  incurred  for  building  up  towns,  con 
structing  railways,  or  other  like  works  ;  if  the  debtors  apply  the 
whole  or  a  portion  of  their  credits  to  these  purposes,  which  are 
wholly  without  the  credit  system,  then  they  must  either  to  that 
extent  fail  to  pay  the  debts  of  trade  and  industry,  or  apply  to 
the  banks  for  accommodation  loans,  or  renewals  of  their  paper 
as  it  matures.  These  shifts  are  fatal  to  the  sound  working  of  the 
credit  system ;  they  show  that  the  debtors  have  parted  with  the 
fund  which  should  have  been  applied  in  payment,  and  that  they 
are  reduced  to  the  necessity  of  asking  the  banks  to  carry  the 
debt  for  them.  This  the  banks  cannot  do  without  imminent 
risk.  When  the  holder  of  a  deposit  draws  his  check  upon  a 
bank  and  pays  a  debt,  a  debt  and  credit  have  met,  and  both  are 
extinguished.  A  debt  is  paid,  and  the  bank  is  acquitted  of  a 
liability  to  the  depositor  to  the  same  amount.  But  if  the  debt 
is  continued  by  accommodation,  or  otherwise,  the  deposit  or 
credit  is  not  used,  and  the  bank  remains  liable,  and  not  merely 
so,  but  liable  on  demand  —  a  risk  which  grows  dangerous  in  pro 
portion  to  the  extent  of  such  practices.  The  banks  which  dis 
count  new  notes  on  time  as  they  are  offered,  giving  bank-notes 
or  deposits  in  exchange,  payable  on  demand,  and  which  to  any 
considerable  extent  renew  or  continue  the  discounted  paper, 
giving  further  time,  must  very  soon  reach  a  point  at  which  they 


502  DANGER    OF    PERVERTING    CREDITS. 

and  their  customers  will  both  collapse.  If  this  wrong  practice 
does  not  originate  in  a  perversion  of  the  funds  applicable  to  the 
payment  of  the  continued  debts,  it  leads  directly  to  it. 

The  instances  of  the  misapplication  of  funds  belonging  strictly 
to  the  operation  of  the  credit  system,  and  the  non-payment  of 
debts  in  consequence,  are  numerous  and  flagrant ;  the  results 
are  full  of  admonitions.  No  severe  and  continued  pressure  in 
the  chief  marts  of  England  and  the  United  States,  no  commer 
cial  revulsion  has  occurred  in  these  countries,  no  ruinous  con 
traction  of  the  currency,  no  general  destruction  of  credit  has 
happened,  of  which  this  misapplication  of  the  funds  of  credit  has 
not  either  been  the  chief,  or  at  least  a  leading  cause.  It  will 
not  be  deniedf  that  our  banking  system  is  responsible  for  a 
large  share  of  this  mischief. 

We  have  seen  that  all  the  funds  thus  perverted  are  the  pro 
ceeds  of  commercial  or  business-paper  discounted  by  the  banks ; 
these  proceeds  belong  of  right  to  the  adjustments  of  the  credit 
system,  but,  owing  to  special  circumstances,  are  applied  to  other 
purposes.  They  are  not  money,  but  merely  securities.  The 
promissory  notes  and  bills  of  exchange,  before  being  discounted, 
would  not  be  susceptible  of  such  perversion,  because  they  are  not 
convenient  nor  efficient  as  currency ;  but  when,  by  being  ex 
changed  for  the  notes  or  deposits  of  a  bank,  a  currency  is  made, 
the  danger  of  perversion  begins.  The  power  and  functions  of 
money  being  conferred  upon  the  proceeds  of  this  discounted 
paper,  it  begins  to  be  regarded  as  money.  It  belongs,  however, 
not  the  less  to  the  channel  of  adjustment  in  which  it  originated. 
The  character  and  functions  of  these  issues  of  the  bank  make 
them  very  efficient,  and  add  greatly  to  their  usefulness ;  but  with 
these  advantages  comes  the  danger  of  misapplication  ;  for  these 
issues  are  not  merely  a  currency  —  they  are  a  currency,  sup 
posed  to  be  convertible,  on  demand,  into  money.  If  the  entire 
issues  of  the  banks  were  really  so  convertible,  nothing  could  be 
said  against  any  use  of  them  which  could  be  made  of  money ;  as 
they  are  not  in  fact,  or  by  any  possibility,  convertible,  the 
assumption  is  dangerous,  by  the  facility  it  affords,  and  the  tempta 
tion  it  offers,  to  employ  bank  issues  as  money. 


THE  PROPORTION  OF  CREDITS  NEEDED.   503 

Of  the  hundred  million  of  deposits  and  circulation  which  the 
New  York  banks  report,  probably  not  five  millions  are  at  any 
one  time  applicable  to  any  other  purpose  than  to  the  current 
payment  of  the  debts  of  industry  and  trade.  These  absorb 
over  $30,000,000  daily.  If,  then,  $50,000,000  of  the  hundred 
should  be  abstracted  from  this  legitimate  use,  and  diverted  to 
other  purposes,  $50,000,000  of  debt  would  remain  unpaid ;  not 
only  so,  but  the  still  larger-  sum  which  this  $50,000,000  would 
have  paid  by  the  ordinary  process  of  circulation  would  also 
remain  unpaid.  The  withdrawal  of  such  a  large  sum  from  the 
current  payments  of  the  day,  and  above  all,  the  stoppage  of  the 
circulation  of  this  sum,  and  the  failure  of  payment  involved  in 
such  stoppage,  would  be  attended  with  results  so  disastrous,  that 
it  would  be  difficult  to  conjecture  where  they  would  end.  The 
ruin  of  many  fortunes  might  be  in  the  path  of  this  evil ;  the 
sacrifices  to  be  made,  the  losses  by  fall  of  prices,  the  high  rates 
of  interest  to  be  paid,  and  the  manifold  other  mischiefs  involved 
in  this  irregularity,  show  that  the  funds  which  belong  to  the 
payments  of  the  credit  system  cannot  be  applied  to  other  uses 
without  consequences  as  lamentable  as  they  are  unjust.  It  may 
be  true,  that  it  is  not  possible  to  prevent  such  abuses ;  that  they 
are,  in  some  measure,  incident  to  the  use  of  credit.  No  doubt 
some  abuses  are  incident  to  every  form  of  credit,  and  that  it  is 
not  possible  to  avoid  all.  We  believe  it  would  greatly  lessen 
the  abuse  of  credit,  if  the  distinction  between  money  and  credit 
were  more  carefully  studied  and  observed.  If  it  were  fully  ad 
mitted  that,  of  the  $100,000,000  of  deposits  and  circulation  of 
the  New  York  banks,  not  more  than  $5,000,000,  or  at  most 
$10,000,000,  could  be  spared  at  any  one  time  from  current  pay 
ments  for  other  purposes,  banks  and  merchants  would  be  more 
watchful  to  prevent  or  check  such  a  perversion  of  credit  as  would 
inflict  a  public  injury.  It  would  no  doubt  greatly  assist  this 
repressive  influence,  if  bank-notes  and  bank  deposits  were  only 
payable  in  specie  at  sixty  or  ninety  days.  These  funds  would 
then  be  marked,  and  their  proper  destination  would  be  known. 
They  could  not  be  so  readily  drawn  off  and  applied  to  other 
purposes.  The  misapplication  could  be  more  readily  detected 


504  CITY    AND    COUNTRY    BANKS. 

and  defeated.  The  banks  are  so  much  interested  to  prevent 
this  abuse,  that  they  would  promptly  avail  themselves  of  any 
additional  power  or  facilities  they  might  employ  against  it. 

We  have  regarded  the  banking  system  of  the  United  States 
only  in  its  general  aspects.  There  is  much  that  is  special  which 
should  arrest  the  attention  of  those  who  would  become  familiar 
with  all  the  details  of  the  subject.  Every  part  of  the  country 
has  its  peculiarities  of  business,  which  impress  their  special  fea 
tures  on  the  local  banking.  Some  care  may  be  necessary  in 
drawing  very  general  conclusions ;  all  which  must  be  modified 
more  or  less  by  peculiar  circumstances.  The  distinction  between 
the  business  of  city  and  county  banks  is  one  of  those  important 
circumstances  that  should  not  be  forgotten  in  any  effort  towards 
improving  our  banking  system,  which,  as  we  have  explained, 
owes  its  power  and  success  to  its  being  one  of  the  principal 
agents  of  the  credit  system.  This  agency,  as  we  have  seen,  con 
sists  mainly  in  exchanging  the  credit  of  the  banks,  in  the  shape 
of  bank-notes  and  deposits,  for  the  securities  or  evidences  of 
debt  issued  in  the  course  of  business.  By  the  purchase  of  these 
securities,  the  banks  become  the  general  creditors  of  persons  in 
business,  and  are  enabled  to  receive  their  own  issues  in  full  dis 
charge  of  all  these  debts  —  debts  which,  by  law,  are  payable 
only  in  gold  or  silver.  The  power  of  the  banks  to  furnish  this 
great  facility  to  the  public  depends  upon  the  demand  which  the 
banks  can  create  for  their  issues.  If  the  demand  for  bank-notes 
and  bank  deposits  is  not  constant  and  strong,  they  cannot  long 
perform  the  functions  of  money ;  and  no  such  demand  can  be 
created  or  exist,  unless  it  come  from  the  debtors  of  the  bank 
who  are  under  the  necessity  of  providing  the  means  of  paying 
their  debts  as  they  mature  from  day  to  day.  The  concentration 
of  payments  involving  vast  sums  makes  the  demand  for  bank 
funds  peculiarly  pressing  and  constant  in  the  great  cities  and 
marts  of  trade.  This  is  likewise  proportionably  the  case  in 
cities  and  towns  of  less  importance.  In  the  country  towns,  or 
in  strictly  agricultural  localities,  the  banks  find  great  difficulty 
in  absorbing  their  issues  fast  enough  to  sustain  the  regular 
movement  of  their  legitimate  business.  The  proper  destination 


COUNTRY    BANKS.  505 

of  these  issues  is  a  return  to  the  banks  in  payment  of  debts. 
This  completes  the  circulation  which  gives  them  the  title  of 
banks  of  circulation.  If  the  tendency  of  its  issues  is  not  directly 
and  strongly  back  to  the  bank,  in  payment  of  debts  due  to  it, 
there  is  good  reason  to  fear  that  the  bank  will  have  difficulty  in 
sustaining  itself. 

Such,  in  fact,  is  the  case  of  the  country  banks.  The  circula 
tion  in  their  vicinity  is  not  rapid  enough,  the  debtors  of  the 
bank  are  not  sufficiently  numerous,  and  their  transactions  are 
not  large  enough  to  turn  the  current  of  the  circulation  towards 
the  bank  in  payment  of  debts.  If  the  issues  of  a  bank  are  in 
such  credit  as  to  be  employed  as  money,  but  not  in  demand 
enough  to  carry  them  back  to  the  bank  in  payment,  they  leave 
the  vicinity  of  the  bank,  or  pass  into  other  channels  of  circula 
tion,  and  become  liable  to  be  returned,  not  in  payments  of  debts 
due  to  the  bank,  but  as  a  demand  on  the  bank  for  speoie. 
Whilst  they  circulate  in  the  vicinity,  they  are  a  medium  of  pay 
ment  to  the  bank,  and  prove,  as  such,  a  great  facility  to  the 
debtors  of  the  bank ;  but  when  they  are  carried  out  of  the  reach 
of  the  debtors,  these  are,  to  that  extent,  less  able  to  pay  the 
bank,  and  the  bank  is,  to  the  same  extent,  exposed  to  a  demand 
for  specie.  This  is  the  chief  practical  obstacle  to  country  bank 
ing  under  our  system.  The  customers  of  the  country  banks  are, 
for  the  most  part,  rather  borrowers  of  money  than  credit ;  the 
banks  cannot  supply  this  demand  for  money,  and  issue  bank 
notes  in  place  of  it.  The  notes  are  carried  to  distant  markets, 
and  employed  as  money,  whence  they  are  immediately  returned 
to  the  issuers  with  a  demand  for  specie.  This  disturbs  the 
operations  of  the  banks,  and  unduly  restricts  their  business. 
They  do  not  profess  to  be  lenders  of  specie,  and  they  cannot 
turn  their  paper  into  gold  or  silver.  The  return  of  the  notes, 
however,  is  perfectly  proper  and  unavoidable.  It  is  just  as  pro 
per  for  the  city  banks  to  exact  payment  from  the  country  banks 
for  their  notes,  as  it  is  proper  for  the  latter  to  issue  them.  The 
truth  is,  that  our  system  of  banking  is  wholly  unsuited  to  a  mere 
country  business.  Banks  of  circulation  require  a  rapid  move 
ment  of  their  issues,  short  credits,  and  prompt  payments.  This 


506  COUNTRY    BANKS. 

is  possible  among  mechanics,  manufacturers  and  merchants, 
whose  business  is  active  throughout  the  year,  but  not  among 
farmers  and  planters,  -whose  cycle  of  industry  and  sales  is  com 
pleted  once  in  a  year.  The  country  banks  may  safely  deal  with 
such  of  their  customers  as  can  pay  in  ninety  days ;  but,  not 
without  great  trouble  and  risk,  with  those  who  can  only  pay  in 
a  year.  No  mere  modification  of  our  banking  system  can  remove 
this  difficulty.  Instead  of  bringing  the  practice  of  the  city  and 
country  banks  nearer  together,  by  mutual  concessions,  they 
should  each  strive  to  accommodate  more  perfectly  their  respec 
tive  customers  —  the  city  banks  by  dealing  more  exclusively  in 
credit,  and  the  country  more  exclusively  in  money.  The  com 
plete  success  of  the  Scottish  banks,  in  maintaining  a  paper  cur 
rency  in  a  small  country  like  Scotland,  does  not  prove  that  it 
could  be  done  here  with  equal  steadiness  and  safety,  even  upon 
their  system.  The  semi-weekly  exchanges  of  the  banks  in  Scot 
land,  which  is  an  essential  feature  of  their  system,  could  not  be 
applied  to  the  whole  United  States.  The  difficulty  of  maintain 
ing  the  exchanges  of  the  banks  in  New  England,  by  the  agency 
of  the  Suffolk  Bank,  proves  with  what  ill-grace  the  country 
banks  there  submit  to  this  needful  regulation.  Whilst  it  is  the 
essential  condition  of  the  soundness  of  the  whole  body,  it  is 
regarded  by  the  country  banks  separately  as  a  severe  and  unne 
cessary  curb  to  their  business  ;  they  deem  it  a  hardship  that  they 
cannot  employ  their  credit  as  largely  and  successfully  as  the 
banks  of  the  cities.  Their  circumstances,  however,  are  so  dif 
ferent  —  the  radical  distinction  in  their  business,  which  we  have 
indicated,  is  so  great  —  that  they  cannot,  by  any  possibility,  be 
placed  on  the  same  footing :  the  issues  of  the  city  banks  are 
returned  to  them  in  payment  of  debts  due  to  them  by  their  cus 
tomers  ;  those  of  the  country  banks  are  brought  to  them  by 
strangers,  who  demand  the  specie,  or  other  payment  equally 
difficult  to  make.  So  far  as  country  banks  receive  from  their 
debtors  and  customers  funds  which  will  redeem  their  notes  when 
thus  sent  in  upon  them,  their  position  is  strong,  and  their  busi 
ness  legitimate :  and  by  this  criterion  the  well-managed  country 
banks  are  usually  guided.  Their  business  is  largely  done 


BANK    REFORM.  507 

by  the  issue  of  bank-notes ;  it  is  to  these  issues,  and  the 
difficulty  the  banks  have  in  providing  for  them  when  payment 
is  demanded,  that  the  attention  of  legislators  and  bank  reformers 
has  been  chiefly  directed.  They  have  erred  in  their  course 
by  overlooking  the  distinction  between  the  business  of  the  city 
and  country  banks ;  all  measures  of  reform  should  be  skilfully 
adapted  to  the  position  of  both  classes  of  banks. 

The  people  are  deeply  interested  in  the  proper  working  of  the 
banks ;  and  when  any  unwise  measures  of  change  or  reform  are 
proposed  or  enforced,  the  public  is  more  apt  to  suffer  from  the 
results  than  the  banks.  The  power  of  the  banks  over  all  depart 
ments  of  business  is  sufficient  to  enable  them  to  ward  off  danger 
and  injury,  but  too  often  at  an  immense  expense  to  their  cus 
tomers  and  the  community  at  large.  The  true  agency  and 
utility  of  the  banks,  in  their  several  positions,  should  be  studied 
and  promoted ;  the  whole  people  being  more  interested  in  the  pro 
per  working  of  the  banks  than  even  the  stockholders  or  owners 
of  the  banks.  The  main  point  is  to  require  of  all  banks  of  cir 
culation  ample  security  for  their  issues,  in  some  form  in  which 
it  can  be  made  available  upon  short  notice.  Security  being 
provided  against  all  abuses,  the  business  of  banking  should 
be  promoted  to  the  utmost,  as  a  public  advantage.  There 
should  be  no  monopoly,  for  all  persons  willing  to  comply  with 
the  prescribed  conditions  should  be  as  free  to  engage  in  it  as  in 
any  other  business.  The  guaranty  should,  in  strictness,  cover 
the  deposits  as  well  as  the  notes,  and  should  be  of  the  highest 
kind  attainable  in  the  country.  Such  security  being  deposited 
with  the  public,  the  banks  should  be  allowed  to  issue  bank-notes 
payable  in  specie  at  not  over  four  months,  and  to  receive  depo 
sits  payable  in  specie  at  not  exceeding  three  months;  both 
notes  and  deposits  receivable  at  all  times  by  the  issuers  for  debts 
due  to  or  at  the  banks.  Holders  of  notes  and  deposits  present 
ing  them  for  payment  before  they  are  payable  in  specie,  and 
not  being  paid  to  their  satisfaction,  should  be  entitled  to  double 
interest  to  the  day  when  such  notes  and  deposits  become  pay 
able  in  specie ;  and  for  all  delay  of  payment  afterwards,  four 
times  the  rate  of  lawful  interest  should  be  chargeable  until  pay- 


508  CLOSING    REMARKS. 

mcnt  be  made.  And  to  enforce  such  payment,  proper  summary 
remedies  should  be  provided. 

The  issue  of  small  notes,  by  which  some  mean  notes  under 
$20,  some  under  $10,  and  some  under  $5,  is  regarded  by  many 
as  the  chief  evil  of  our  banking  system.  They  hold  that  the  paper 
currency  should  have  a  metallic  basis  in  circulation  to  support 
it ;  and  that,  if  the  small  notes  are  withdrawn,  their  place  will 
be  supplied  by  coins.  This  is  a  mistaken  view ;  coins  in  circu 
lation  make  no  basis  for  paper  currency ;  the  withdrawal  of  the 
small  notes  in  New  England  would  not  be  followed  by  an  equal 
circulation  of  coins.  The  small,  notes  are  issued  for  convenience ; 
if  they  were  withdrawn,  two-thirds  of  the  amount  would  be  sup 
plied  by  larger  notes.  If  notes  under  $5  were  now  freely  issued  in 
Pennsylvania,  a  large  proportion  of  the  $5  notes  now  in  circula 
tion  would  be  issued  in  $1,  $2  and  $3  notes.  If  New  York  and 
New  England  were  to  prohibit  notes  under  .$5,  they  might  get 
from  ten  to  twenty  per  cent,  of  the  amount  in  coin.  The  people 
there  would  regard  that  coin  as  dearly  bought  by  such  an  ab 
straction  of  paper  currency.  By  law,  every  person  may  exact 
whatever  is  due  to  him  in  gold  or  silver,  and  make  his  payments 
in  the  same.  Every  person  may,  therefore,  enjoy  a  hard  money 
currency.  No  one  does  it ;  the  usages  of  the  country  are  opposed 
to  it.  The  small  note  question  is,  in  fact,  without  real  import 
ance  ;  it  does  not  reach  the  mam  problems  of  banking.  The 
banks  of  Pennsylvania,  with  notes  of  $5  and  upwards,  stopped 
payment  in  the  late  crisis  before  those  of  New  York  and  New 
England,  circulating  Is,  2s  and  3s.  The  commercial  integrity, 
the  intelligence  and  mutual  confidence  of  a  people  determine  the 
quantity  of  paper  currency,  be  the  notes  large  or  small,  which 
the  people  can  employ  with  advantage. 

But  we  must  pause.  It  was  not  our  intention,  nor  is  it  within 
our  plan,  to  offer  any  projects  of  reform  or  improvement  for  our 
banking  system.  In  making  the  suggestions  at  the  close  of  this 
chapter,  we  olfer  them  in  part  as  mere  illustrations  of  the  sub 
ject,  and  do  not,  therefore,  even  attempt  to  follow  these  sugges 
tions  by  proper  details.  We  leave  that  to  men  of  more  expe 
rience,  if  any  such  shall  deem  these  suggestions  worthy  of  their 
consideration. 


CHAPTER    XVIII. 

INTEREST. 

Distinction  between  prices  of  precious  metals  and  interest  or  the  price  pay* 
able  for  the  use  oftJiem  —  The  price  of  each  fixed  by  the  State  —  Evasion 
of  such  regulations  —  Fluctuations  in  the  price  of  gold  and  silver  not  coin 
cident  with  fluctuations  in  the  rate  of  interest  —  Do  not  proceed  from  the 
same  causes  —  Payments  of  the  credit  system  — When  interest  is  high,  the 
demand  is  not  for  coins  —  Demand  for  facilities  of  the  credit  system  deter 
mines  rate  of  interest  —  High  interest  does  not  arise  from  scarcity  of  that 
for  which  interest  is  paid,  but  from  the  fears  of  banks  and  capitalists  — 
The  usual  facilities  withheld  from  real  or  apprehended  danger — Usury 
laws  should  not  apply  to  paper  of  the  credit  system  —  Amount  paid  yearly 
in  the  United  States  for  interest —  Objections  —  Interest  a  part  of  the 
expense  of  commercial  adjustment  —  Not  a  question  of  money,  but  of  dis 
pensing  with  money  —  A  saving  of  interest  practicable  in  England  and 
the  United  States  greater  than  the  national  revenue. 

THE  price  paid  for  the  use  of  money  has  received  the  techni 
cal  name  of  interest.  It  is  a  subject  which  has  occupied  no 
small  portion  of  the  attention  of  moralists,  legislators  and  politi 
cal  economists ;  but,  like  most  other  topics  in  these  departments 
of  knowledge,  it  remains  a  disputed  subject.  It  is  not  settled 
what  is  the  proper  rate  of  interest,  or  a  just  charge  for  the  use 
of  money ;  nor  whether  the  rate  should  be  fixed  by  law,  or  be 
the  subject  of  contract,  and  be  left  to  fluctuate  like  other  prices. 
Many  even  cling  to  the  ancient  prejudice  against  any  allowance 
of  interest.  The  history  of  interest,  or  usury  as  it  was  long 
termed,  is  both  curious  and  instructive ;  but  in  neither  aspect 
does  it  come  within  our  present  inquiry. 

There  is  a  necessary  distinction  to  be  made  between  the  price 
of  the  precious  metals,  whether  as  coins  or  as  bullion,  and  the 
rate  of  interest  which  is  the  price  of  the  use  of  money  —  as  the 

(509) 


510  PRICES    OF    GOLD    AND    SILVER. 

annual  rent  of  a  building  is  a  very  different  thing  from  the  value 
or  price  of  it.  Governments  have  fixed  the  price  of  the  precious 
metals,  by  virtue  of  their  authority ;  in  England,  public  autho 
rity  has  declared  that  an  ounce  of  gold  shall  be  worth  <£3  17s. 
lOJc?.,  and  further  has  enjoined  upon  the  Bank  of  England  to 
purchase  all  the  gold  offered  to  it  at  c£3  17s.  $d.  In  the  United 
States,  Congress  has  declared,  by  law,  that  412J  grains  of 
standard  silver  shall  be  worth  one  dollar,  and  that  258  grains 
of  gold  shall  be  worth  ten  dollars.  And  in  this  manner  the  price 
of  other  coins  is  fixed  not  only  in  the  two  countries  named,  but 
in  other  countries.  This  is  only  an  attempt  to  fix  the  price  of  the 
precious  metals,  an  attempt  which  is  as  futile  as  it  is  unneces 
sary.  The  precious  metals  have  their  fluctuations  of  price,  as 
may  be  seen  in  the  price-currents  of  the  great  money-markets 
of  the  world,  just  as  other  valuable  commodities. 

So  the  rate  of  interest,  or  the  price  paid  for  the  use  of  money, 
has  also  been  made  the  subject  of  public  regulation,  and  is,  in 
fact,  fixed  in  most  countries  at  rates  determined  by  public  autho 
rity.  This  intervention  of  public  authority  in  matters  so  evi 
dently  within  the  range  of  private  contract,  is  extensively  disre 
garded.  The  price  of  gold  and  silver  fluctuates,  and  merchants 
and  bankers  are  governed  in  their  large  operations  by  these 
changes ;  interest  rules  high  or  low,  according  to  circumstances, 
in  defiance  of  the  fixed  rates.  It  is  very  plain,  indeed,  that  no 
government  has  yet  reached  or  discovered  the  true  mode  of  ap 
plying  authority  to  these  subjects,  if  any  intervention  is  needful 
or  proper.  But  neither  of  these  aspects  of  the  subject  is  that  we 
desire  now  to  consider. 

The  fluctuations  in  the  price  of  the  precious  metals  are  within 
a  range  of  two  or  three  per  cent.,  seldom  exceeding  one  per 
cent. ;  whilst  the  fluctuations  in  the  rate  of  interest  have  a  range 
of  two  or  three  hundred  per  cent.1  It  is  evident,  then,  that  the 

1  The  average  rate  of  interest  in  London  is  three  per  cent. ;  in  the  winter 
of  1857-8,  it  was  as  high  as  ten  per  cent.,  or  over  three  hundred  per  cent, 
above  the  average.  The  market  rate  of  interest  in  Philadelphia  has,  for 
the  last  ten  years,  ranged  from  six  to  twenty-four  per  cent.,  going  up  to 
three  hundred  per  cent,  above  the  legal  rate  of  six  per  cent. 


INTEREST    NOT    DEPENDENT    UPON    MONEY.    511 

causes  which  govern  the  rate  of  interest  are  not  the  same  which 
govern  the  price  of  gold  and  silver.  It  is  well  known  that  gold 
and  silver,  as  such,  are  worth  no  more,  when  interest  is  at  two 
per  cent,  a  month,  than  when  it  is  at  the  half  of  one  per  cent, 
per  month  ^  the  price  of  gold,  in  coin  or  bullion,  is  no  higher 
in  London  when  interest  is  ten  per  cent,  per  annum,  than  when 
it  is  three  per  cent.  When  lands  and  houses  bring  increased 
rents,  they  rise  in  value ;  when  stocks  afford  high  dividends,  the 
price  of  the  stock  corresponds ;  when  freights  rule  high,  ships 
rise  in  price ;  and  so  of  most  other  kinds  of  property.  Coins 
and  bullion,  or  money,  alone  remain  unaffected  by  the  rate 
which  is  paid  for  their  use,  or  the  current  rate  of  interest. 
If  fluctuations  in  value  of  bullion  and  coins  be  closely  observed, 
they  will  be  found  to  arise  from  a  special  demand  for  exporta 
tion,  or  from  some  other  similar  causes,  and  not  to  correspond  in 
time  with  changes  in  rates  of  interest. 

It  is  evident  that  neither  coins  nor  bullion  are  the  specific 
things  sought,  when  the  demand  for  means  of  payment  is  so 
pressing  as  to  raise  the  rate  of  interest.  The  demand  in  such 
cases  is  for  the  fund  usually  employed  in  making  payments. 
This  alone  can  be  obtained  in  sufficient  amount  to  make  current 
payments,  and  it  is,  therefore,  the  real  object  of  the  demand. 
Commercial  paper  is  very  rarely  purchased  or  discounted  with 
coins.  Where  commerce  is  greatly  developed,  nearly  all  large 
transactions  are  upon  credit ;  the  payments  are  postponed,  and 
evidences  of  debt  are  received  instead.  A  single  merchant  may 
purchase  to  the  extent  of  $100,000,  giving  his  notes  for  that 
amount ;  he  may  sell  to  the  extent  of  $105,000,  and  receive  the 
paper  of  others.  What  this  merchant  wants  is  not  $100,000 
in  coins,  bullion,  or  bank-notes,  to  meet  his  engagements  to  that 
amount;  he  needs  the  means  or  facility  of  applying  $100,000 
of  the  paper  he  holds,  in  extinguishment  of  the  $100,000  he 
owes.  He  never  thinks  of  obtaining  coins  to  make  these  large 
payments,  and  of  course  makes  no  application  or  demand  for 
them,  even  though  the  rate  of  interest  may  have  risen  against 
him  two  or  three  hundred  per  cent.,  and  the  market  price  of 
gold  and  silver  may  not  have  changed  at  all.  If  our  example  be 


512    INTEREST  NOT  DEPENDENT  ON  COINS. 

taken  of  a  thousand  persons  instead  of  one,  and  those  in  the  same 
vicinity,  it  will  be  found  that  the  sum  of  their  dealings  with  each 
other,  represented  by  the  paper  they  hold,  amounts  yearly  to 
hundreds  of  millions  —  a  sum  which  could  not  be  discharged  in 

o 

coins  as  fast  as  it  would  mature,  and  which  no  one  thinks  of  so 
paying.  Each  one  of  the  mass  is  a  creditor  and  debtor,  and  the 
desideratum  is  the  readiest  and  least  expensive  mode  of  apply 
ing  credits  to  debts.  If  each  one  had  made  all  the  paper  upon 
which  he  is  liable  payable  on  the  same  day  on  which  he  had 
arranged  to  receive  all  that  is  owing  to  him,  the  whole  payments 
could  be  quickly  accomplished.  But  that  is  not  practicable  in 
business ;  and  the  debtors  find  that  the  paper  they  owe  matures 
long  before  that  which  they  hold.  They  are  obliged  to  exchange 
their  undue  paper  for  something  which  is  immediately  applicable 
or  receivable  in  payment.  Every  one  knows  what  he  has  to  pay, 
and  when  it  is  payable ;  preparation  is  to  be  made  accordingly ; 
the  thing  to  be  done  is  not  to  provide  money,  but  to  effect  pay 
ment —  not  to  purchase  and  pay  coins,  but  to  extinguish  debts. 
The  debtor  enters  a  field  of  mighty  competition ;  but  his  com 
petitors,  like  himself,  are  all  engaged  in  finding  and  securing 
the  ways  and  means  of  payment. 

We  have  seen  that  the  price  of  coins  and  bullion  does  not  vary 
with  the  rate  of  interest,  and  we  say  that  they  are  not  the  arti 
cles  specially  sought  when  interest  is  high.  They  do  not  fluc 
tuate  in  value  with  the  greater  or  less  amount  of  such  payments ; 
they  are  scarcely  taken  into  the  account  for  any  agency  they 
have,  or  can  have,  in  such  payment.  By  the  law  of  legal  tender 
at  least  $3,000,000,000  in  coins  could,  every  year,  be  demanded 
of  debtors  in  the  United  States.  Of  this  vast  sum,  not  one  dol 
lar  in  $10,000  is  so  demanded.  The  precious  metals,  whether 
in  the  shape  of  coins  or  bullion,  are  not,  then,  the  chief  medium 
of  payment  employed  in  this  country.  Every  creditor  may  de 
mand  such  payment,  if  he  prefers  it ;  almost  without  exception, 
however,  creditors  do  not  elect  to  be  so  paid.  Debts  are  paid 
by  other  ways  and  means. 

The  rate  of  interest  must  depend,  of  course,  upon  the  supply 
of  that  fund  or  medium  in  which  debts  are  usually  paid.  Debts 


THE  FUND  ON  WHICH  INTEREST  DEPENDS.  513 

are  paid  chiefly  in  three  ways ;  by  balancing  accounts,  by  the 
delivery  of  bank-notes,  and  by  checks  on  bank  credits  usually 
called  bank  deposits.  Those  who  are  indebted  to  each  other 
upon  mutual  accounts,  have  the  matter  in  their  hands  so  fully, 
that  they  can  pay  or  discharge  their  debts  at  their  pleasure. 
Each  party  has  the  fund  in  which  to  pay,  and  their  action  can 
have  no  appreciable  effect  on  the  rate  of  interest.  But  the  debts 
so  paid  are  not  considerable,  in  comparison  with  those  which 
take  the  shape  of  promissory  notes  and  bills  of  exchange.  These 
are  the  evidences  of  debt  chiefly  employed  in  moving  the  great 
staples  of  trade.  It  is  for  payment  of  these  that  the  demand  for 
the  means  becomes  so  pressing  and  intense,  as  to  affect  the  rate 
of  interest  to  the  extent  of  several  hundred  per  cent.  It  is  this 
demand  for  bank-notes  and  bank  credits  which  governs  the  rate 
of  interest  or  discount.  In  large  commercial  transactions  upon 
paper  drawn  payable  at  a  future  day,  interest  takes  almost  ex 
clusively  the  shape  of  a  deduction  of  a  certain  rate  per  cent, 
from  the  amount  of  the  security,  according  to  the  time  it  has 
to  run. 

He  who  has  §100,000  to  pay  in  June  and  December,  who 
holds  paper  of  his  customers  payable  in  October,  must  with  that 
paper  purchase  bank-notes,  or  bank  credits,  applicable  to  his 
debts  maturing  in  June ;  and  to  do  this,  he  must  submit  to  a 
deduction  or  discount,  according  to  the  current  rate  of  interest, 
from  the  face  of  his  paper  maturing  in  October.  He  deducts 
four  months'  interest  from  the  paper  sold,  and  receives  the  pro 
ceeds  in  that  which  he  knows  to  be  available  in  the  discharge  of 
his  debts.  The  rate  of  this  discount  depends  mainly  on  the  de 
mand  for  such  funds  as  are  applicable  to  the  payment  of  debts. 
We  have  heretofore  remarked  upon  the  intensity  of  this  demand ; 
no  other  urgency  of  trade  can  be  compared  with  it.  Ruin  stares 
him  in  the  face  who  permits  his  note  to  go  unpaid.  The  penalty 
of  failing  to  pay  is  fearful,  indeed,  and  the  rate  of  interest  is 
affected  accordingly  in  times  of  pressure.  It  is  only  in  seasons 
of  absolute  famine  that  even  food  is  sought  with  such  avidity  as 
the  means  of  paying  debts ;  and  famine  prices  for  food  are  much 
more  rare  than  famine  rates  of  interest.  One,  two  and  three 
33 


514  CREDIT    SYSTEM    AND    INTEREST. 

hundred  per  cent,  of  an  advance  in  the  rates  of  interest  is  by  no 
means  uncommon. 

It  may,  then,  be  considered  as  certain  that  interest  is  not  a 
price  paid  for  the  use  of  gold  or  silver,  in  coins  or  bullion. 
No  demand  for  the  means  of  payment,  however  intense,  in 
creases  the  price  of  the  precious  metals.  Interest  is  the  price 
paid  for  that  fund  in  which  debts  are  usually  paid,  the  origin 
and  use  of  which  we  have  fully  explained. 

As  the  credit  system  is  at  present  regulated,  a  demand  for 
gold  and  silver  may  undoubtedly  affect  the  rate  of  interest,  not 
because  they  may  possibly  advance  in  price  one  or  two  per  cent., 
but  because  the  demand  disturbs  our  present  banking  system,  on 
the  regular  working  of  which  the  supply  of  the  fund  employed 
in  paying  debts  depends.  So  great  may  this  disturbance  be, 
that  a  demand  for  coins  or  bullion  for  exportation  which  only 
raises  the  price  one  per  cent.,  may  raise  the  rate  of  interest  from 
one  to  three  hundred  per  cent.  But  this  arises  from  the  circum 
stance  that  we  try  to  make  the  whole  fund  out  of  which  debts  are 
paid,  convertible  on  demand  into  gold  or  silver.  The  banks  of 
New  York,  for  instance,  with  a  circulation  of  notes  of  only 
$8,000,000,  are  by  law  subject  to  a  demandfor  over  $100,000,000, 
the  amount  of  their  circulation  and  deposits,  which  is  the  fund 
by  which  a  daily  payment  of  over  $30,000,000  is  effected. 

The  manufacturing  and  commercial  business  of  civilized  na 
tions  proceeds  chiefly  on  credit.  The  purchases  and  sales  are 
made  on  credit.  The  great  movement  of  production,  distribu 
tion  and  consumption  proceeds,  in  its  regular  course,  upon  the 
credit  of  the  parties  engaged  in  it.  The  payments  correspond 
ing  to  the  large  transactions  which  have  taken  place  at  prices 
and  for  amounts  expressed  in  money  of  account,  remain  to  be 
accomplished  by  the  agencies  we  have  indicated.  These  pay 
ments  are  often  effected  with  far  more  difficulty,  apart  from  the 
solvency  of  the  debtors,  under  our  present  system,  than  was  ex 
perienced  in  doing  the  business  to  which  they  correspond.  The 
banks  in  this  country  are  prohibited  from  taking  more  than  a 
fixed  legal  rate  of  interest  for  a  credit  upon  their  books.  Indi 
vidual  capitalists  are  able  to  exact  their  own  rates  upon  securi- 


HIGH    INTEREST    NOT    CAUSED    BY    SCARCITY.    515 

ties  which  they  purchase,  by  transferring  merely  a  portion  of 
their  own  credit  on  the  books  of  a  bank.  The  rate  of  interest, 
or  the  price  paid  for  bank  credits,  is  fixed  by  the  dealings  be 
tween  the  banks  and  capitalists,  on  the  one  hand,  and  those 
who  have  debts  to  pay,  on  the  other.  In  a  community  where 
commercial  punctuality  is  sustained  at  so  high  a  point,  that 
bankruptcy  is  the  penalty  of  a  failure  to  meet  the  payments  of 
one  day,  the  demand  for  the  means  of  payment  becomes,  at 
times,  by  far  the  severest  pressure  to  which  men  of  business 
are  exposed.  In  consequence  of  this  dire  necessity  of  punc 
tuality,  the  rate  of  interest,  where  it  is  free  to  change,  fluctuates 
with  a-s  wide  a  range  as  almost  anything  which  is  the  subject  of 
price.  In  the  Bank  of  England,  the  rate  of  interest  fluctuates 
between  two  and  ten  per  cent.,1  though  this  by  no  means  marks 
the  range  in  the  London  money-market,  in  which  the  rate  is 
more  variable  than  in  the  bank.  In  this  country,  where  com 
mercial  and  industrial  activity  is  marked  by  greater  boldness, 
if  not  recklessness,  the  range  may  be  said  to  lie  between  five 
and  thirty  per  cent. 

These  high  rates  do  not  arise  from  the  scarcity  of  money,  if 
by  money  is  meant  gold  and  silver,  for  they  are  not  the  medium 
employed  nor  demanded,  and  have  no  direct  influence  on  the 
rate  of  interest.  Neither  do  these  high  rates  proceed  from  any 
scarcity  of  the  credit  fund  employed  in  paying  debts,  or  at  least 
from  any  scarcity  of  the  individual  paper  out  of  which  these 
credits  are  made.  High  rates  of  interest  are  caused  either 
by  banks  or  capitalists  holding  credits  at  a  high  rate,  in 
consequence  of  a  great  demand,  or  by  their  refusing,  through 
some  apprehension,  to  grant  the  usual  credits  or  facilities.  As 
there  is  no  "necessity  of  business  so  great  as  that  of  punctual 
payment,  so  there  is  no  business  in  which  monopoly  is  more  sure 
to  be  rewarded,  than  that  which  deals  in  bank  credits.  Advanced 
rates  are  not  caused,  in  any  instance,  by  the  actual  scarcity 
of  the  means  of  payment,  but  always  by  the  mode  in  which  they 

1  The  last  half  of  1852  it  was  two  per  cent.  In  1855  and  1856  it  fre 
quently  rose  to  seven  ;  and  in  the  panic  of  1857,  to  ten. 


516  INTEREST  ON  CREDIT,  AND  INTEREST  ON  MONEY. 

are  controlled,  and  sometimes  from  the  want  of  proper  control. 
The  domestic  debts  and  credits  of  every  community  correspond, 
being  exact  counterparts.  The  credits,  properly  managed,  will 
pay  the  debts,  leaving  of  course  a  great  variety  of  balances  to 
be  adjusted  among  the  parties,  to  go  to  new  accounts,  or  to  be 
paid  in  money  or  in  goods.  It  is  perfectly  true,  then,  that  it  is 
never  for  want  of  the  usual  means  that  interest  rules  high ;  it  is 
merely  because  the  means  of  making  payments  are  in  the  hands 
of  those  who  can  hold  them  at  a  high  price,  or  who  are  afraid  to 
part  with  them.  This  opportunity  of  asking  and  obtaining  a 
high  price  is  generally  founded  on  some  actual  or  apprehended 
event,  which  may  make  it  unsafe  to  enlarge  bank  credits.  It  is 
not  always  the  scarcity*  of  a  commodity  which  enables  the  holders 
of  it  to  raise  the  price.  There  may  be  no  scarcity  of  flour  in 
May,  yet  the  crops  may  look  so  very  unpromising,  as  to  cause  a 
great  advance  of  the  price,  in  apprehension  of  a  scarcity  in 
August  and  for  the  rest  of  the  year.  The  dealers  in  credits 
cannot  be  expected  to  forego  the  opportunity  of  increasing  the 
price  of  their  article,  any  more  than  the  dealer  in  cotton  or 
flour. 

We  abstain  from  such  questions  touching  the  rate  of  interest, 
as  whether  it  should  be  left  to  find  its  own  level,  or  be  a  rate 
fixed  by  law.  These  questions  open  a  wide  field  of  discussion, 
and  deserve  very  full  consideration.  It  seems  to  us,  however, 
that  a  distinction  should  be  taken  between  interest  reserved  on 
bonds,  notes,  and  other  instruments  secured  by  mortgage, 
founded  on  the  sale  of  real  estate,  or  on  the  loan  of  money, 
where  the  day  of  payment  is  not  fixed  or  long  deferred,  and 
those  transactions  which  are  merely  a  dealing  in  credit.  It  is 
certainly  more  proper  for  legislation  to  fix  the  rate  on  the  first 
of  these  classes  than  on  the  second.  The  first  is  a  limited  class, 
and  the  result  of  any  rate  fixed  could  be  observed  and  corrected 
as  circumstances  might  dictate.  But  dealing  in  credit  is  so 
large  a  business,  so  complicated  in  its  bearings,  influences  and 
results,  and  restraints  so  easily  evaded,  that  it  maybe  difficult,  if 
not  impossible,  to  detect  the  eifect  of  a  legal  or  fixed  rate.  There 
is  a  general  belief  that  a  legal  or  fixed  rate  of  interest  applied  to 


ANNUAL    CHARGE    OF    INTEREST.  517 

mere  dealings  in  credit  has  the  effect  of  producing  higher  rates 
of  interest,  by  lessening  the  competition  among  lenders  and 
dealers  in  credit. 

Whatever  confines  the  business  to  fewer  hands,  tends  to  in 
crease  the  rates,  because  it  gives  the  greater  power  to  those 
engaged.  The  fixed  rate  is  no  protection,  except  so  far  as  the 
banks  respect  it.  It  is  very  well  known  that  when  interest  is 
high,  the  banks  are  in  such  a  state  of  alarm,  that  they  reduce 
their  business  to  the  smallest  possible  circle.  Individuals  en 
gaged  in  lending  credit  find  some  mode  of  evading  any  law 
which  would  restrict  their  charges.  We  cannot  doubt  that  it 
would  be  greatly  for  the  benefit  of  the  commercial  and  business 
community,  that  all  restrictions  upon  the  rate  of  interest  should 
be  abolished  upon  paper  not  having  over  three  or  four  months 
to  run.  Any  policy  which  might  tend  to  reduce  the  rate  of  in 
terest  on  credits  deserves  serious  attention. 

The  sum  paid  in  the  shape  of  interest,  for  the  mere  facility  of 
applying  credits  to  the  payment  of  debts  —  that  is,  for  furnish 
ing  the  facility  which  enables  a  man  to  apply  the  debts  which 
others  owe  him  to  the  debts  he  himself  owes  —  is  a  vast  sum  in 
any  country ;  but  in  this  country,  and  in  England,  it  is  far  be 
yond  the  conjecture  of  any  but  those  who  have  examined  the 
subject. 

The  banks  of  the  United  States  report,  for  the  year  1856,  a 
line  of  loans  and  discounts  of  $684,000,000 ;  at  the  average 
rate  of  six  per  cent.,  they  received  upwards  of  §41,000,000  of 
interest  on  this  sum.  How  much  business  is  done  out  of  the 
banks,  it  is  difficult  to  conjecture.  The  transactions  out  of  the 
banks  are  probably  not  less  than  in  them,  and  at  much  higher 
rates.  We  may  estimate  the  sum  paid- for  discount  arid  interest, 
out  of  the  banks,  at  $68,000,000  for  1856,  taking  ten  per  cent, 
as  the  average  rate  of  that  year.  The  average  rate  of  1857  could 
scarcely  have  been  less  than  fifteen  per  cent.  So  that,  by  this 
estimate,  over  §100,000,000  was,  in  1856,  paid  for  interest  in 
the  United  States. 

The  clearings  of  the  New  York  banks,  in  1857,  were  about 
§7,196,000,000.  These  clearings  accrue  upon  the  payments  of 


518  GRATUITOUS  INTEREST. 

their  customers.  If  we  suppose  that  all  this  amount  had  cost 
the  payers  two  months'  interest,  on  the  average,  we  have  a  sum 
of  interest  of  over  $71,000,000  paid  in  New  York  alone. 

But  another  mode  of  estimating  the  sum  of  interest  annually 
paid  in  the  United  States  would  make  it  much  larger.  We 
have,  in  the  preceding  chapter,  estimated  the  payments  of  the 
city  of  New  York  at  $30,000,000  daily,  and  have  taken  the 
whole  payments  of  the  United  States  at  ten  times  this  sum,  or 
?300?0005000  each  day,  and  of  course  at  $90,000,000,000  for 
the  year.  Now,  if  this  vast  sum  of  annual  payments  under  the 
credit  system  pays  an  average  of  sixty  days'  interest,  or  say  one 
per  cent,  on  the  whole  amount,  it  would  make  the  sum  of  interest 
paid  yearly  no  less  than  $900,000,000.  But  if  the  payments  of 
the  rest  of  the  country  are  only  five  times  greater  than  those  of  the 
city  of  New  York,  we  should  still  have  a  total  of  $450,000,000. 
"We  do  not  say  it  is  too  much  to  pay  for  the  advantages  afforded ; 
we  think  these  facilities  would  be  worth  even  a  much  larger  sum, 
if  they  could  not  be  obtained  otherwise ;  but  the  amount,  in  any 
way  it  can  be  estimated,  is  so  large,  as  to  demand  consideration 
whether  some  part  of  it  could  not  be  saved  by  more  economical 
processes  of  adjustment. 

It  has  been  contended  by  some,  that  interest  ought  to  be 
gratuitous ;  or,  in  other  words,  that  as  interest  is  a  charge  for 
the  mere  use  of  a  credit,  the  government  should  furnish  the 
needful  supply  of  credits  to  the  people  without  charge.  This 
idea  has  been  very  elaborately  repelled,  but  upon  grounds  no 
more  sound  than  the  position  sought  to  be  refuted.  The  proper 
and  legitimate  fund  to  meet  deferred  payments,  in  every  coun 
try,  is  the  credits,  or  exact  counterpart  of  the  debts.  It  is  the 
proper  fund,  because  it  is  -the  most  available,  the  most  economi 
cal,  and  the  most  rapid  mode  of  payment.  These  credits 
being  generally  the  proceeds  of  securities  or  evidences  of  debt 
of  some  kind,  are  always  the  property  of  individuals  or  corpora 
tions.  For  the  use  or  loan  of  credits,  the  owners  have  as 
good  a  right  to  charge  a  commission,  or  interest,  as  to  charge  a. 
profit  on  anything  they  have  to  sell,  or  to  exact  rent  for  the 
use  of  a  house.  Credits  are  constantly  more  in  demand  thau 


INTEREST  ONE  EXPENSE  OF  ADJUSTMENT.  519 

any  single  thing  in  the  marts  of  trade.  There  is  nothing  paid 
for  more  willingly,  and  no  charge  can  be  more  legitimate.  But 
this  by  no  means  obliterates  the  distinction  between  credits 
and  money.  The  arguments  advanced  by  some  men  of  ability 
against  gratuity  of  interest  proceed  wholly  upon  the  ground  that 
all  interest  is  for  money,  and  that  it  is  absurd  to  expect  a 
government  to  furnish  the  people  with  money  for  their  busi 
ness,  or  to  pay  them  interest.  It  is  true  enough,  that  this  would 
not  only  be  absurd,  but  impossible ;  yet  it  is  no  more  absurd 
than  to  assume  that  credits  are  money,  and  that  interest  is  only 
paid  for  money.  Nine-tenths  of  the  so-called  interest  paid  in 
commercial  countries  is  paid  for  the  privilege  and  facility  of 
paying  debts  without  money. 

Commercially  regarded,  interest  is  one  portion  of  the  annual 
expense  of  adjusting  commercial  payments.  By  means  of  indi 
vidual  credit  —  personal  confidence  —  the  commodities  of  trade 
are  permitted  to  go  forth  into  the  channels  of  trade,  to  be  col 
lected,  transported,  assorted,  bought  and  sold,  until  they  finally 
reach  the  hands  of  consumers ;  the  payments  which  all  these 
movements  imply  being  all  postponed,  and  finally  concentrated 
as  a  separate  and  special  business  in  the  banks,  and  among 
brokers  and  dealers  in  commercial  paper,  who  make  this  their 
particular  occupation. 

The  great  inquiry  arising  out  of  this  business  is  not  one  of 
money  or  currency  —  it  is  merely  one  of  adjustment.  It  is  not 
how  may  banks  be  multiplied,  or  their  issues  increased,  or  how 
abuses  of  banking  may  be  prevented,  or  guarantees  increased, 
or  convertibility  insured,  but  how  may  men  most  promptly,  and 
at  the  least  expense,  apply  their  credits  in  extinguishment  of 
their  debts.  It  is  not  a  question  how  money  can  be  obtained 
for  this  purpose ;  nor  how  far  bank-notes  can  be  substituted  for 
money ;  nor  is  it,  in  fact,  any  question  of  currency  or  circula 
tion,  but  simply  a  question  of  liquidation  or  set-off.  It  is  so 
far  from  being  a  mere  question  of  money,  or  any  of  its  substi 
tutes,  that  the  problem  is  how  to  dispense  to  the  utmost  possible 
extent  with  all  of  them.  Their  use  is  what  constitutes  the 


520  ECONOMY    OF    INTEREST. 

greatest  expense  of  adjustment;  economy  requires  that  the 
least  possible  resort  should  be  had  to  them. 

We  are  fully  convinced  that  much  of  the  friction  of  the 
credit  system,  now  so  much  felt  and  lamented,  and  which 
results  largely  in  that  form  of  expense  or  charge  which  is 
called  interest,  might  be  prevented ;  and  that  a  saving  might, 
in  this  way,  be  effected  of  more  than  half  of  the  whole  amount 
thus  expended.  We  do  not  doubt  that  the  economy  thus  prac 
ticable  in  England  and  in  the  United  States  would,  in  each 
country,  be  double  the  public  revenue.  We  do  not  say  that 
such  an  economy  is  possible  with  the  present  machinery  and 
methods ;  but  with  improved  processes,  which  would  inflict  no 
shock  upon  existing  institutions,  and  bring  no  risks  with  the 
gradual  changes,  the  cost  of  carrying  on  the  payments  of  the 
credit  system  might  be  reduced  one-half,  if  not  to  one-quarter, 
of  the  present  charge,  with  a  proportionate  reduction  of  the 
amount  paid  for  interest ;  and  that  friction  which  is  the  cause 
of  so  many  misfortunes,  and  so  much  distress,  might  be  thus 
reduced  to  a  point  as  low  as  human  imperfections  in  matters  of 
this  kind  would  permit. 

Human  ingenuity  on  the  one  hand,  and  human  patience  on 
the  other,  has  long  been  exhausted  on  the  subject  of  taxation. 
It  would  be  well  for  those  who  are  deeply  interested  in  the 
study  of  this  subject,  to  inquire  whether  a  door  is  not  open, 
through  the  credit  system,  to  a  mode  of  raising  the  whole,  or 
a  large  portion  of  the  revenue  of  a  nation,  by  taking  a  burden 
off  the  national  industry,  instead  of  imposing  one.  The  bur 
den  or  tax  of  interest  is  now  the  heaviest  which  rests  upon 
national  industry  in  England  and  in  the  United  States,  and 
perhaps  in  several  other  nations ;  if  half  of  that  tax  can  be 
saved,  the  persons  benefited  could  well  afford  to  pay  the  whole 
of  the  national  expenditure.  The  reduced  friction  would  be  a 
boon  to  industry  and  commerce  almost  beyond  estimate.  How 
gladly  would  those  concerned  pay  the  tax,  if  the  friction  of  the 
machinery  of  credit,  with  all  its  uncertainties,  its  disappoint 
ments,  its  delays,  its  anxieties,  and  the  dangers  of  its  occasional 
crushing  revulsions,  and  explosions  could  be  prevented ! 


CHAPTER  XIX. 

PRICES. 

g  1.  Complexity  oftlie  subject — Market  value  expressed  in  money  of  account 
— Prices  are  not  payments  —  Money  a  medium  of  payment  —  Prices,  sales, 
and  payments  distinct  things  —  Elements  of  prices  —  Influence  of  men's 
interests  and  passions  —  Necessity  of  purchasing  —  Necessity  of  selling  — 
Fashion  and  fancy  —  Plenty  and  scarcity —  Demand  and  supply  —  Mono 
polies  —  Commercial  legislation  —  Duties  —  Speculation  —  Cost  of  pro 
duction  —  Prices  as  affected  in  great  marts  of  trade. 

THE  subject  of  prices,  always  an  absorbing  one  in  commercial 
circles,  has  only  recently  engaged  the  attention  of  writers  upon 
political  economy.  Few  of  these  have  brought  to  the  task  that 
practical  knowledge  of  commerce  which  is  indispensable  to  its 
adequate  treatment ;  and  many  have  brought  only  that  love  of 
theory  and  system  which  too  often  goes  before,  instead  of  follow 
ing  a  full  knowledge  of  facts.  We  fear  that  a  long  time  must 
elapse  before  this  subject  will  be  cleared  of  the  difficulties  which 
environ  it,  and  be  reduced  to  that  order  and  certainty  desirable 
in  so  important  a  department  of  knowledge.  Very  few  contribu 
tions  have  yet  been  published  which  go  far  to  produce  such  a 
result.1  It  may  be  doubted,  too,  whether  it  be  susceptible  of 


1  Since  the  above  was  written,  a  work  of  eminent  ability  and  great  re 
search  has  appeared  in  England,  which  is,  beyond  dispute,  the  most  relia 
ble  and  useful  contribution  which  has  yet  been  made  to  any  department 
of  political  economy.  We  refer  to  "  The  History  of  Prices/'  by  Thomas 
Tooke,  two  volumes  of  which  appeared  in  London  in  1838,  a  third  in  1840, 
a  fourth  in  1848,  and  two  more  in  1858,  in  which  last  two  Mr.  Tooke  had 
the  assistance  of  William  Newmarch.  These  six  volumes  are  a  history 
of  prices  from  1792  to  1858.  This  valuable  production  will  be  specially 
referred  to  in  the  course  of  this  chapter. 

(521) 


522  DEFINITION    OF    PRICE. 

reduction  to  any  comprehensive  theory,  or  of  any  scientific 
arrangement.  Fortunately,  it  does  not  come  within  the  scope 
of  the  present  work  to  attempt  any  adequate  treatise  on  prices. 

It  is  our  purpose  chiefly  to  show  that  those  who,  in  treating 
of  banking,  currency  and  money,  have  hastily  drawn  proofs, 
conclusions  or  illustrations  from  the  state  of  prices,  are  exceed 
ingly  prone  to  mistake.  Whatever  intrinsic  difficulties  exist  in 
those  subjects,  and  they  are  many,  they  are  neither  so  numerous 
nor  so  complex  as  those  which  belong  to  the  subject  of  prices : 
it  is,  therefore,  manifestly  hazardous  to  explain  what  is  best 
known  by  that  which  is  least  understood.  There  are  so  many 
conflicting  opinions  and  contradictory  theories  respecting  money 
and  its  substitutes,  that  it  is  as  desirable  to  ascertain  and  avoid 
the  sources  of  mistake  as  to  strive  after  truth.  It  would  be 
almost  as  unsafe  to  resolve  difficulties  in  astronomy  by  the  state 
of  the  weather,  as  questions  about  money  by  the  state  of  prices. 

The  importance  of  the  subject  is  derived  from  the  fluctuations 
to  which  prices  have  been  subject  in  modern  times,  and  in  all 
times  of  which  any  authentic  record  of  prices  exists.  As  fluc 
tuations  of  prices  are  often  vexatious,  untimely  and  hurtful  to 
all  classes ;  as  they  often  beget  a  gambling  spirit  in  commerce, 
and  thereby  tend  to  increase  and  perpetuate  the  evil,  it  becomes 
important  to  anticipate  or  to  prevent  them,  and  to  investigate 
the  causes ;  and  equally  important  to  avoid  attributing  them  to 
wrong  causes,  and  thence  to  avoid  introducing  false  doctrines, 
false  management,  and  mistaken  legislation. 

The  price  of  merchandise  is  its  market  value  expressed  in 
money  of  account.  We  have  shown,  in  a  previous  chapter,  that 
among  civilized  people  prices  are  always  expressed  in  the  pre 
vailing  money  of  account,  whatever  that  may  be ;  that  whatever 
coin  or  coinage,  thing  or  commodity,  men  may  for  a  time  use  as 
a  medium  of  exchange,  a  money  of  account  is  soon  formed  upon 
the  coin  or  thing  so  employed  ;  the  value  of  this  as  a  unit  be 
comes  firmly  fixed  in  the  mind,  and  supersedes  in  practice  the 
material  article  which  may  have  given  it  origin.  A  unit  of  this 
kind  may  originate  from  the  use  of  copper  or  iron,  as  well  as 
from  gold  or  silver. 


MONEY    NOT    A    MEDIUM     OF    PRICES.  523 

This  invariable  and  unconquerable  mental  habit  of  expressing 
prices  only  through  the  medium  of  a  money  of  account,  is  a 
great  feature  of  this  subject,  without  a  knowledge  of  which  it  is 
impossible  to  study  it  with  advantage.  Many  persons  are  per 
fectly  conversant  with  the  money  of  account,  who  know  little  or 
nothing  about  coins,  and  are  unable  to  detect  the  baldest  coun 
terfeit  :  they  are  skilled  in  the  money  of  account,  but  unskilled 
in  money  of  gold  or  silver.  Coins  are  made  to  conform  to  the 
money  of  account  to  the  minutest  fraction,  and  are  thus  made  a 
convenient  medium  of  payment,  but  not  a  medium  of  prices. 
They  are  not  employed  as  a  measure,  but  are  themselves  mea 
sured  by  the  money  of  account. 

We  have  treated  this  at  large  in  the  chapter  on  money  of 
account,  but  it  is  needful  to  bring  the  distinction  fully  to  mind 
now,  when  we  propose  to  speak  directly  of  prices.  Many  per 
sons  entertain  the  notion  that  there  is  some  proportion  between 
the  money  of  a  country  and  the  prices  of  its  commodities ;  and 
that  prices  are  high  or  low,  in  proportion  as  money  is  plenty  or 
scarce.  There  is  some  truth  in  this,  but  it  is  not  true  as  a  pro 
position.  Prices  are  not  dependent  on  money ;  prices  are  not 
payments ;  and  even  payments  are  not  dependent  on  money. 

Money,  and  other  means  of  payment,  may  be  exceedingly 
scarce  or  hard  to  obtain,  but  there  can  be  no  scarcity  in  the  lan 
guage  of  prices.  The  prices  of  commodities  may  fall,  because 
many  must  sell,  and  the  means  of  payment  may  be  scarce ;  but 
the  facility  of  expressing  prices  is  never  thus  lessened.  The 
'  whole  of  the  commodities  of  a  country  have  their  price,  but  it 
might  not  be  possible  to  sell  them  all  in  a  year.  The  naming 
of  prices,  the  making  of  sales,  and  the  making  payments,  are 
each  distinct  operations  ;  and,  as  we  have  seen,  neither  of  them 
is  dependent  for  its  validity  on  the  presence  or  use  of  money. 
Gold  and  silver,  whether  in  coins  or  in  bullion,  have  their  ap 
propriate  uses  in  commerce,  and  these  are  important  enough, 
without  attributing  to  them  an  agency  in  which  they  have  no 
part.  There  is  no  strict  or  determinate  relation  between  the 
quantity  of  money  in  a  country,  and  its  range  of  prices.  They 
act  and  react  upon  each  other  in  a  way,  and  to  an  extent,  that 


524  ELEMENTS    OF    PRICES. 

it  is  well  to  mark  and  study ;  but  these  influences  are  too  unde- 
finable,  and  too  much  blended  with  other  causes,  to  be  exactly 
appreciated.  Of  all  the  causes  which  materially  affect  the 
range  of  prices  in  a  country,  the  changes  in  the  quantity  of 
money  are,  perhaps,  the  least  influential.  On  this  point  more 
hereafter. 

This  may  suggest  to  those  who  have  not  taken  any  extended 
view  of  the  subject,  the  necessity  of  caution  in  solving  questions 
of  money  and  currency,  by  reference  to  fluctuations  in  prices ; 
as  whatever  influence  money  or  currency  may  actually  have  on 
prices,  there  are  so  many  other  ways  in  which  prices  may  be 
changed,  many  of  which  are  remote  and  unseen,  and  many  not 
appreciable  as  to  their  force,  that  no  more  doubtful  nor  unsafe 
basis  could  be  selected  on  which  to  rest  conclusions.  The  dan 
ger  of  such  conclusions  is,  however,  much  greater  than  anything 
we  have  yet  said  suggests.  It  must  be  borne  in  rnind  that  many 
of  the  most  operative  of  these  elements  of  fluctuation  in  prices 
are  under  the  full  play  of  men's  interests  and  passions.  The 
most  powerful  springs  wThich  move  the  human  heart  are  found  at 
work  in  this  game ;  scope  is  furnished  for  all  good  and  all  bad 
principles,  for  the  highest  financial  abilities  and  the  most  unre 
mitting  industry.  These,  too,  are  often  pitted  against  sloth, 
inertness,  ignorance,  dulness  and  indecision.  The  commerce 
of  the  world,  in  which  the  whole  matter  of  prices  is  involved,  is 
a  great  struggle  for  that  power  which  accrues  to  wealth  —  a 
struggle  constantly  maintained,  with  varying  success,  over  the 
whole  world,  the  advantage  being  generally  on  the  side  of  the 
shrewd  and  skilful,  but  with  abundant  occasional  evidences  that 
the  fortunes  of  this  contest  are  as  capricious  as  the  favors  of  for 
tune  have  ever  been  deemed.  Supposing,  even,  that  an  accurate 
enumeration  of  the  causes  which  operate  to  change  prices  were 
made,  who  then  could  measure  their  ever-varying  intensity,  who 
could  estimate  the  operation  of  men's  reason  and  passions  upon 
these  causes ;  who  could  foresee  the  effect  of  those  which  are 
accidental ;  who  could  discover  those  which  are  hidden ;  who 
could  discern  those  which  are  remote,  or  weigh  the  effects  of 
commercial  alarm,  or  trace  the  result  of  commercial  revulsion  ? 


NECESSITY    OF    PURCHASING.  525 

Yet  all  this,  and  more,  should  those  be  able  to  do  who  would 
settle  questions  of  currency  by  the  condition  or  fluctuation  of 
prices. 

These  suggestions  in  relation  to  prices  might  suffice  to  put  us 
upon  our  guard  as  to  the  influence  of  money  or  currency  upon 
prices  ;  but  so  accustomed  are  many  to  draw  support  for  their 
theories  of  money  and  banking  from  this  source,  that  we  pro 
pose  to  refer  distinctly  to  some  of  the  causes  which  chiefly  influ 
ence  and  determine  the  range  of  prices  in  the  marts  of  com 
merce. 

The  necessity  of  purchasing  is  an  element  of  prices  of  con 
trolling  force.  Those  who  have  the  means  of  purchasing  cannot 
postpone  hunger  and  thirst.  They  must  secure  the  means  of 
subsistence,  cheap  if  they  can,  but  dear  if  they  must.  The  mat 
ter  does  not  admit  of  delay,  nor  of  long  negotiation.  It  is 
evident,  therefore,  that  those  articles  termed  necessaries  of  life 
are  only  kept,  by  the  extent  of  the  supply,  and  the  correspond 
ing  wants  of  those  who  hold  them,  from  going  constantly  to  the 
highest  prices.  The  necessity  thus  imposed  is  universal ;  none 
can  escape  its  force ;  and  yet  such  is  the  variety  of  substances 
which  minister  to  animal  life  and  comfort,  that  even  this  neces 
sity,  and  the  knowledge  of  what  it  requires  to  satisfy  the 
cravings  of  these  appetites,  furnish  little  aid  to  those  who  would 
estimate  the  supply  which  will  meet  this  demand.  In  fact,  how 
ever,  men  no  more  agree  in  the  quantity,  quality  or  kind  of  arti 
cles  deemed  necessary  for  subsistence  and  comfort,  even  in  the 
same  circumstances,  than  they  do  in  stature,  in  features,  or  in 
mind.  This  necessity,  therefore,  which  acts  continually  and 
imperatively  upon  prices,  furnishes  no  data  by  which  its  force 
can  be  measured,  or  by  which  it  can  be  distinguished  from  other 
less  powerful  influences.  It  only  appears  in  full  view  when 
famine  or  great  scarcity  begins  to  prevail,  and  then  it  shows  how 
unimportant  every  other  article  becomes,  in  comparison  with 
food.  The  necessity  of  eating  is,  nevertheless,  equally  great  in 
times  of  plenty  as  in  those  of  scarcity.  Prices  are  then  con 
trolled  by  the  supply  in  the  face  of  a  necessity  to  purchase. 
There  is,  however,  a  wide  field  of  conjecture  about  the  sufficiency 


526  THE    NECESSITY    OF    SELLING. 

of  that  supply,  both  in  reference  to  the  quantity  really  needed, 
and  the  quantity  really  on  hand.  It  is  upon  conjectures  and 
estimates  of  this  kind  that  men  of  all  sorts  of  minds,  from  the 
most  astute  and  well-informed  to  the  most  dull  and  ignorant, 
from  the  boldest  and  most  rash  to  the  most  timid  and  cautious, 
exercise  their  powers:  as  such  men  determine,  prices  are 
affected ;  and  the  operations  of  one  man  are  often  sufficient  to 
affect  prices  over  a  wide  extent  of  country. 

The  necessity  of  selling  corresponds  very  nearly  to  that  of 
purchasing ;  for,  in  general,  men  can  only  realize  the  means  of 
purchase  by  the  process  of  selling.  The  compulsion  to  sell  must 
operate  to  depress  prices  as  much  as  necessity  to  purchase  en 
hances  them.  A  necessity  of  selling  equally  affecting  prices, 
and  scarcely  less  imperative,  arises  in  commerce  from  the  obli 
gation  punctually  to  meet  engagements.  This  is  one  of  the 
most  active  and  operating  agencies  which  affect  prices.  Mer 
chants  and  manufacturers  would,  but  for  this,  and  the  new  sup 
plies  which  are  coming  on  behind,  be  disposed  to  hold  their 
commodities  for  the  highest  prices  which  could  be  exacted.  They 
must,  however,  meet  their  payments,  or  become  bankrupt ;  and 
to  do  this  they  must  provide  the  means,  by  making  sales. 
Those  whose  wealth  would  enable  them  to  hold  up  their  goods, 
are  controlled  by  those  who,  from  want  of  means,  are  compelled 
to  make  prompt  sales  upon  small  profits.  The  urgency  of 
making  sales  for  this  purpose  sometimes,  doubtless,  becomes  ex 
cessive,  and  causes  great  sacrifices ;  but,  in  general,  it  operates 
to  steady  prices,  by  interfering  with  the  speculations  of  heavy 
capitalists. 

Who  Can  conjecture  the  influence  of  fashion,  of  fancy,  of 
taste,  of  extravagance,  of  inexperience,  of  hobby-riding,  &c.,  &c., 
upon  the-  prices  of  those  articles  which  are  subject  to  such 
caprices  ?  The  newest  productions  of  the  loom,  of  the  needle, 
of  the  tailor's  shears,  of  the  milliner's  taste,  are  sought  for  with 
an  avidity,  a  perseverance,  and  a  disregard  of  price,  which  bids 
defiance  to  all  discretion.  So  it  is  with  the  first  fruit  and  the 
first  fish  in  the  market :  so  with  old  wines,  old  books,  old  coins, 
old  paintings,  and  old  statuary.  Let  any  one  observe  how  large 


CAPRICE  —  PLENTY  —  SCARCITY.  527 

a  portion  of  men  in  trade  are  employed  in  furnishing  commodi 
ties  to  satisfy  these  and  similar  inordinate  desires,  and  he  will 
be  convinced  that  the  prices  of  no  small  portion  of  the  articles  of 
trade  are  dependent  upon  the  mere  caprice  of  the  consumers, 
and  the  adroitness  of  the  tradesmen.  The  observer  will  find 
that  the  dealer  in  these  articles  resorts,  when  the  rage  for  pur 
chase  is  up,  to  prices  which  will  compensate  him  for  the  freaks 
of  customers,  who  often  so  suddenly  change  their  wants,  as 
to  leave  a  large  stock  of  articles  hopelessly  on  his  hands. 
Here,  then,  is  a  rapid  fluctuation  of  prices,  caused  by  wayward 
ness,  and  folly,  and  caprice ;  and  this  happens  from  year  to 
year,  under  no  more  regular  control  than  the  most  irregular 
wants  of  the  most  irregular  people.  The  results  of  this  are, 
however,  felt  throughout  all  the  range  of  prices,  but  with  what 
effect  who  can  tell? 

The  terms  plenty  and  scarcity  are  often  used  in  regard  to 
commodities  of  trade,  and  with  sufficient  precision,  perhaps,  to 
convey  no  false  idea.  It  is  certainly  impossible,  however,  to 
ascertain  with  any  exactness  the  quantity  of  any  principal  com 
modity  ;  the  attempt  is  constantly  being  made,  and  the  approxi 
mation  may  be  useful,  though  only  measurably  reliable.  It  is  not 
seldom,  that  large  mistakes  are  made  in  these  estimates.  They 
are  not  unfrequently  made  by  interested  persons,  with  a  view  to 
influence  prices;  and  it  is  well  known  that  many  important 
commodities,  such  as  cotton,  wheat,  coffee  and  tea,  have  their 
prices,  to  no  small  extent,  influenced  in  that  way. 

In  regard  to  many  articles,  it  is  often  impossible  to  say  when 
plenty  exists,  or  even  when  scarcity  has  occurred.  There  are, 
to  be  sure,  occasions  when  there  can  be  no  doubt  as  to  either 
condition.  In  the  former  cases,  prices  take  their  course  from 
men's  conjectures ;  and  in  the  latter,  from  the  apathy  produced 
by  undoubted  plenty,  or  the  excessive  alarm  and  eagerness  pro 
duced  by  undoubted  scarcity.  It  is  well  known  that,  in  both 
extremes,  the  natural  effects  are  increased  beyond  what  would 
,  appear  to  be  the  proper  result.  In  the  case  of  plenty,  the  cer 
tainty  of  a  steady  and  cheap  supply,  when  needed,  relieves  the 
purchaser  from  any  anxiety,  and  he  abstains  from  purchasing 


528  DEMAND  —  SUPPLY. 

until  the  moment  of  need.  The  necessities  of  the  holders  may 
be  such,  that  they  cannot  wait  this  time ;  and  they  are  obliged 
to  urge  their  stock  on  a  market  in  which  there  is  little  demand, 
and  of  course  at  reduced  prices.  On  the  contrary,  when  scarcity 
is  apprehended,  every  one  measures  the  danger  by  his  fears,  un 
willing  to  wait  coolly  for  results  which  may  be  so  disastrous.  All 
pecuniary  considerations  are  sunk  in  the  dread  of  want,  and 
prices  go  rapidly  to  the  highest  rates.  In  England,  a  very  defi 
cient  harvest  of  wheat  has  often  sold  for  more  money  than  a  very 
abundant  one ;  so  in  the  United  States,  as  to  cotton. 

In  regard  to  quantity,  prices  generally  transcend  the  appa 
rently  proper  limit,  on  the  occurrence  of  either  extreme ;  whilst 
a  medium  opens  a  wide  region  of  conjecture,  and  sometimes 
leads  to  very  mistaken  movements. 

The  commercial  terms,  demand  and  supply,  do  not  corre 
spond  exactly  with  the  more  general  and  absolute  terms,  plenty 
and  scarcity.  The  first  relate  merely  to  the  operations  of  trade, 
while  the  latter  refer  to  actual  quantities.  This  distinction  is, 
perhaps,  frequently  forgotten,  or  not  observed.  The  demand 
which  exists  for  articles  of  commerce,  and  the  supply  which 
is  furnished  in  response  to  that  demand,  can  never  be  placed  be 
yond  the  reach  of  contingencies,  so  numerous  and  so  varied, 
as  to  be  out  of  the  reach  of  any  possible  specification.  If  it 
were  the  business  of  government  to  furnish  its  subjects  with 
all  the  commodities  they  need,  it  would  be  possible  to  make  such 
an  approximation  of  the  quantity  and  kinds  wanted  as  would 
enable  its  agents  to  order  them  with  some  precision.  Even  with 
such  advantages,  any  attempt  to  meet  the  changing  wants,  de 
sires  and  caprices  of  men  must  be  unsuccessful.  How  much 
more  so,  where  the  course  of  trade  commits  this  business  to  a 
host  of  merchants,  all  greedy  of  gain,  or  fearful  of  loss,  all 
anxious  for  business,  but  consulting  chiefly  their  own  interest, 
acting  without  concert,  and  without  that  knowledge  of  each 
other's  operations  which  could  alone  enable  them  to  pursue  their 
business  with  intelligence! 

Men  thus  situated  are  left  to  act  according  to  their  various  cha 
racters  —  boldly,  timidly,  irresolutely  or  rashly  —  and  according 


SUDDEN  CHANGES  —  JERKS.          529 

to  the  best  information  they  can  obtain,  which  at  the  best  must 
be  always  very  imperfect.  Success  in  the  operations  of  one 
year  encourages  them  into  measures  which  end  in  disaster  the 
next ;  and  this,  in  its  turn,  produces  over-caution  in  succeeding 
times.  And  these  alternations  must  ever  occur  in  trade,  while 
commerce  is  carried  on  by  the  disconnected  enterprise  of  indi 
viduals.  And  yet  the  operation  of  trade  in  regard  to  supply 
and  demand,  is  subject  to  all  the  influences  which  create  these 
alternations ;  and  so  far  as  prices  are  affected  by  quantities 
actually  on  hand,  they  are  subject  to  corresponding  variations. 
The  supply  of  commodities  which  is  offered  to  consumers  is 
not  only  subject  to  the  contingencies  affecting  the  several 
branches  of  industry  which  produce  them,  but  to  all  the  varying 
opinions,  wishes,  estimates  and  dispositions  of  the  merchants  who 
carry  on  the  business ;  and  in  addition,  to  all  the  accidents  and 
delays  of  transportation  by  sea  and  land. 

The  chief  stimulus  of  production  is  demand ;  but  this  demand 
proceeds  from  the  masses,  of  whom  some  are  prudent  and  foresee 
ing,  some  observing  and  cautious,  some  venturous  and  rash,  some 
with  experience,  some  without,  and  some  utterly  foolish  and 
heedless :  those  upon  whom  the  demand  is  made  are  of  like  cha 
racter  ;  and  prices  are  in  no  small  degree  settled,  and  supplies 
regulated,  by  the  action  of  such  persons  upon  each  other. 
Prices  adjusted  by  such  agencies  can  never  be  foretold,  and  must 
rest  upon  a  complex  combination  of  circumstances,  such  as  can 
not  be  fully  unravelled  nor  analyzed. 

Many  of  the  great  fluctuations  and  jerks  which  occur  in  prices 
arise  from  the  schemes,  the  hopes,  the  mistakes,  the  enterprises, 
and  the  deceptions  of  those  engaged  in  commerce,  and  have 
almost  no  relation  with  the  actual  quantities,  or  cost  of  produc 
tion,  of  those  articles,  the  prices  of  which  are  affected.  There 
are  so  many  insurmountable  uncertainties  hanging  round  all 
questions  of  supply  and  demand,  that  men,  in  a  wilderness  of 
doubts,  but  grope  their  way  at  best ;  and  the  results  upon  prices 
are  as  little  to  be  conjectured  as  those  which  depend  wholly  upon 
chance. 

Monopolies  are  the  subject  of  much  complaint.  The  hardship 
34 


530  MONOPOLIES. 

and  injustice  imposed  by  them  are  so  visible  to  every  eye,  that 
they  have  been  constant  objects  for  the  hand  of  reform.  Two 
centuries  ago,  nearly  every  department  of  commerce  and  indus 
try  was  under  the  control  of  monopoly  in  almost  every  country 
of  Europe.  Many  yet  remain,  to  prove  what  must  have  been 
the  injustice  suffered  by  those  who  lived  when  they  were  more 
numerous.  Their  influence  upon  the  prices  of  the  monopolized 
articles  is  too  well  known  to  require  much  notice.  The  inhabi 
tants  of  France  know  well  enough  that  the  price  of  tobacco  is 
greatly  enhanced  to  them  by  the  government  monopoly ;  but 
the  producers  and  dealers  in  the  article,  in  this  country,  do  not 
so  generally  know  that,  if  the  French  monopoly  was  abolished, 
the  consumption  there  would  be  increased,  and  the  price  here 
would  be  enhanced.  The  heavy  duties  of  England  upon  the 
same  article  are  equivalent  to  the  monopoly  in  France  ;  to  aban 
don  them  would  have  the  same  effect  of  raising  the  price  in 
this  country.  The  removal  of  the  European  monopolies  of  our 
products,  or  of  heavy  duties,  would  at  once  reduce  the  price 
there,  and  raise  it  here,  upon  the  commodities  thus  set  free. 
The  amount  before  realized  by  monopolies  and  duties  would  fall 
fairly,  if  not  equally,  to  the  producer  and  consumer,  by  a  double  ad 
justment  of  prices.  Monopolies,  therefore,  often  react  upon  those 
who  may  not  suppose  themselves  under  their  influence,  and  at 
such  a  distance,  that  those  affected  may  neither  perceive  the 
effect,  nor  be  aware  of  the  cause.  The  power  of  the  monopoly 
is  chiefly  felt  in  its  direct  effort  to  control  prices,  which  its  col 
lected  strength,  and  unity  of  action,  enable  it  to  attempt  with 
advantage.  The  effects  of  these  efforts  are  often  made  to  extend 
to  places  where  few  can  clearly  detect  them,  or  perhaps  suspect 
their  influence.  They  are  yet  sufficiently  numerous,  and  effi 
ciently  managed,  to  produce  a  very  undoubted  effect  upon  cer 
tain  prices ;  and  yet  there  is  no  possibility  of  measuring  that 
influence,  or  determining  its  comparative  force  and  intensity. 

Commercial  legislation,  protective  and  prohibitory  duties,  and 
public  revenue,  exercise  a  very  important  influence  upon  a  large 
class  of  prices ;  of  so  wide  a  subject,  we  can  only  touch  the 
threshold.  The  chief  countries  of  Europe  commenced  a  system 


COMMERCIAL    LEGISLATION.  531 

of  legislation  upon  industry  and  commerce,  in  modern  times, 
•which  has  been  continued,  with  many  changes  and  vicissitudes, 
for  some  two  centuries.  A  similar  policy  was  begun  in  this 
country,  as  soon  as  it  could  legislate  for  itself.  The  complica 
tion  of  this  legislation  in  Europe  is  such,  that  very  few  can  trace 
its  results.  The  laws  relating  to  navigation  and  tonnage,  the 
prohibition  to  export  the  precious  metals,  the  bounties,  the  pro 
hibition  of  certain  articles,  the  light  duties  on  some,  the  heavy 
charges  on  others,  the  discriminating,  the  protective  and  the 
prohibitory  duties,  the  drawbacks,  &c.,  all  operating  together  in 
each  country,  and  in  conflict  with  those  of  other  countries,  make 
a  compound  which  no  human  ingenuity  or  astuteness  can  so 
analyze  and  explain,  as  to  show  their  specific  bearing  upon 
prices.  No  one  in  the  least  conversant  with  the  subject  can 
overlook  the  important  influence  exercised  in  that  respect  by  all 
this  legislation ;  and  in  some  instances  no  one  can  fail  to  per 
ceive  the  particular  effect ;  but  the  whole  result  of  this  combi 
nation  defies  explanation.  When,  however,  to  this  complication 
is  added  the  events  of  war,  restrictive  systems,  embargoes,  block 
ades,  and  such  measures  as  the  Berlin  and  Milan  Decrees,  and 
the  Orders  in  Council,  then  the  elements  which  influence  prices, 
and  their  comparative  power,  baffle  human  scrutiny. 

It  is  worthy  of  being  noted  here,  as  an  illustration  of  the 
rashness  with  which  men  form  opinions  upon  matters  which  they 
have  not  fully  examined,  and  do  not  understand,  that  from  the 
year  1800  to  1815,  during  which  time  a  most  animated  discus 
sion  on  the  subject  of  banking  and  currency  was  maintained  in 
Great  Britain,  one  party  drew  its  arguments  and  illustrations, 
and  formed  its  conclusions,  upon  the  condition  of  prices  in  that 
period.  The  same  readiness  to  form  and  express  opinions  on 
similar  grounds  has  been  shown  ever  since,  both  there  and  in 
this  country;  all  men  seeming  to  think  that  currency  and 
prices,  money  and  banking,  were  subjects  about  which  the  most 
authoritative  decisions  might  be  pronounced,  without  special 
knowledge  or  hesitation.  The  newest  demagogues,  the  most 
ignorant  and  presuming  journalists,  the  experienced  and  the  in 
experienced,  and  in  fine  all  classes  of  men,  supposed  themselves 


532        SPECULATION  NOT  DEFINABLE. 

fully  qualified  to  solve  questions  of  this  kind.  It  has  happened, 
therefore,  that  no  subject  has  ever  been  so  bestridden  and  rode 
down,  so  abused  by  foolish,  and  so  confused  by  contradictory 
opinions,  emanating  from  the  highest  authority  down,  through 
every  grade  of  respectability,  to  zero.  The  few  who,  in  this 
time,  have  devoted  prolonged  attention  to  this  subject,  and 
proved  themselves  painful  and  anxious  inquirers  after  truth, 
have  scarcely  been  noticed  in  the  mass. 

It  is,  perhaps,  impracticable,  to  draw  a  line  between  the  ordi 
nary  processes  of  dealing  and  what  is  termed  speculation. 
What,  if  done  by  one  man,  would  be  deemed  speculative,  may 
be  perfectly  within  the  legitimate  scope  of  another's  business. 
What,  in  times  of  great  confidence  and  active  business,  would 
be  deemed  quite  prudent  and  proper,  would,  in  seasons  of  pres 
sure  and  caution,  be  called  reckless  speculation.  What  a  man 
of  capital  may  do  without  exciting  attention,  a  less  rich  man 
may  not  do  but  at  the  hazard  of  being  called  a  speculator. 
Speculation  cannot,  therefore,  be  defined,  although  its  preva 
lence  is  matter  of  much  lamentation.  Its  influence  in  trade  is 
*  constantly  felt,  and  its  operation  on  prices  is  very  decided  and 
notorious.  Its  chief  design  is  undoubtedly  to  give  undue,  or  at 
least  unusual,  excitement  to  prices.  Its  movements  are  as  various 
as  the  conjunctures  of  commerce,  and  the  men  engaged  in  it. 
The  very  uncertainty  of  the  events  of  trade,  and  the  ever  fluc 
tuating  condition  of  prices  consequent  upon  it,  furnish  constant 
openings  for  the  intervention  of  speculation.  The  observing, 
the  well-informed,  the  experienced,  and  the  bold,  are  those  who 
are  ever  ready  to  avail  themselves  of  those  circumstances  which 
are  constantly  occurring  in  some  branch  of  trade,  by  which  they 
anticipate  an  advance  in  prices,  or  produce  one  by  their  own 
management.  There  are,  doubtless,  certain  limits  within  which 
this  kind  of  action  is  deemed  legitimate  and  honorable.  It  is 
too  tempting  a  field,  however,  not  to  be  occupied  by  many  actu 
ated  by  fraud,  by  a  greedy  spirit,  by  rashness,  by  the  spirit  of 
competition,  and  by  sheer  infatuation.  This  class,  though  more 
irregular  in  their  movements,  are  not  unfrequently  as  successful 
in  their  operations  as  the  more  deserving :  and  both  frequently 


EFFECTS    OF    SPECULATION.  533 

fail  of  their  immediate  object,  even  when  their  movements  are 
felt  in  a  change  of  prices.  This  multifarious  body  of  speculators 
may  be  said  to  be  continually  operating  upon  the  market  values 
of  the  commodities  which  they  touch,  and  through  them  upon 
various  others.  This  influence,  like  many  other  elements  of 
prices,  can  neither  be  measured  nor  estimated  in  its  actual  or 
comparative  force ;  it  can  neither  be  anticipated,  nor  can  its 
evil  effects,  to  any  considerable  degree,  be  averted,  without  in 
terfering  with  the  freedom  of  trade  to  a  most  injurious  extent. 
It  must  continue  to  be  a  disturbing  element  of  commerce,  and 
prices  must  hereafter,  as  heretofore,  be  subject  to  its  manifold, 
incessant  and  active  agencies. 

The  tendency  of  speculation  is  undoubtedly  to  widen  the  range 
of  fluctuations,  not  only  in  the  prices  of  the  articles  operated 
upon,  but  also  of  many  others.  This  spirit  is  more  rife  and 
active  in  times  of  high  confidence,  when  prices  are,  from  that 
cause,  looking  up,  than  when  any  depressing  cause  operates  to 
check  the  movements  of  trade.  It  suits  the  views  of  the  specu 
lator  to  urge  upward  prices  that  are  tending  to  rise,  rather  than 
to  attempt  staying  the  downward  course  of  a  falling  market. 
Dealers  in  stocks  speculate  on  their  fall,  but  merchants  only  on 
the  expected  advance  of  goods.  The  general  effect  of  specula 
tion,  whilst  moving  within  moderate  bounds,  is  therefore  to  sus 
tain  and  enhance  prices ;  and  this  effect  may  be  continued  for 
many  years,  under  the  operation  of  favoring  causes,  such  as  a 
steady  government  and  liberally-.managed  banking  institutions, 
provided  there  be  some  restraining  power  of  sufficient  strength 
to  repress  that  wild  extravagance  to  which,  otherwise,  specula 
tion  always  hastens.  The  periods  of  greatest  commercial  pros 
perity,  in  Europe  and  in  the  United  States,  have  been  those  in 
which  this  state  of  things  existed.  Prices  must  be  high,  when 
commerce  is  active,  when  new-comers  are  constantly  press 
ing  into  business,  when  those  already  engaged  are  seeking  to 
enlarge  their  trade,  when  credit  is  high,  when  all  are  on  the 
alert,  when  personal  credit  is  sufficient  to  make  all  kinds  of  pur 
chases  without  the  use  of  money,  or  any  of  its  substitutes.  Such 
causes,  so  long  as  they  continue,  must  operate  on  prices ;  and 


534  SPECULATION  —  EXPANSION. 

there  is  no  question  that,  duly  restrained,  they  promote  general 
prosperity.  So  all  experience  proves ;  but  experience  provesr 
also,  that  if  this  restraining  power  does  not  exist,  or  be  not  effi 
ciently  exercised,  the  expansion  of  personal  credit,  and  the  ad 
vance  of  prices  consequent  upon  incessant  and  uncontrolled 
speculative  action,  proceeds  to  a  height  at  which  they  cannot 
remain,  and  the  whole  fabric  of  confidence  falls  at  once.  The 
reaction  is  rapid  and  complete,  and  prices  descend  below  their 
wonted  level. 

All  who  are  conversant  in  the  walks  of  commerce  can  recall 
the  signal  effects  of  speculation  on  prices,  not  only  in  special  in 
stances,  but  in  that  state  of  restless  activity  and  watchfulness 
which  prompts  men  to  be  ever  looking  for  advantageous  pur 
chases,  and  to  secure  the  highest  prices  far  what  they  sell.  Yet 
what  is  more  common  than  to  attribute  such  results  to  an  expan 
sion  of  currency,  without  reserve  or  qualification.  The  reverse 
is  very  often  the  true  state  of  the  case ;  the  expansion  is  the 
result  of  the  speculation,  and  not  the  speculation  the  result  of 
the  expansion.  In  seasons  of  confidence,  when  men's  notes  are 
freely  received  for  the  commodities  of  trade,,  the  first  step  towards 
the  evils  of  undue  expansion  is  a  great  issue  of  bills  of  ex 
change  and  promissory  notes  of  merchants  and  dealers,  who  thus- 
multiply  their  engagements,  without  immediately  increasing  the 
quantity  of  goods  in  the  market ;  and  these  bills  and  notes 
being,  for  the  convenience  of  the  holders,  converted  into-  bank 
notes,  an  increase  of  circulation  takes  place,  which  is  called  an 
expansion ;  many  evils  are  referred  to  this  which  clearly  be 
long  to  speculation,  and  not  to  expansion  of  currency.  If  the 
word  expansion  be  proper  in  this  case,  it  should  be  applied  to 
the  enlargement  of  individual  credit.  In  most  of  these  cases, 
the  issue  of  bank-notes  is  an  alleviation  of  the  evil,  and  not  an 
aggravation.  The  ability  of  the  speculating  parties  to  meet 
their  engagements  depends  on  their  succcess  in  selling,  for  bank 
notes,  the  goods  purchased,  or  for  something  else  which  will  be 
received  in  discharge  of  their  liabilities.  The  issue  of  the  bank 
notes  greatly  facilitates  such  sale  and  payment.  If  it  be  said 
that  this  high  confidence  which  enables  parties  to  make  such 


EXPANSION    OF    CURRENCY  —  PRICES.  53£> 

large  purchases  on  the  strength  of  their  own  bills  or  notes  would  not 
exist,  but  for  the  facility  of  converting  them  into  bank  paper, 
there  is  much  force  in  the  objection.  The  fault  is,  however,  one 
of  degree :  the  advantages  of  individual  credits,,  and  of  bank 
notes,  within  proper  limits,  are  generally  conceded ;  and  the 
first  fault  is  committed,  in  this  case,  in  the  community  of  men 
of  business,  and  not  by  the  banks.  That  an  increased  issue  of 
bank-notes,  consequent  upon  over-trading  may  stimulate  prices, 
especially  in  the  retail  trade,  is  very  probable,  but  not  to  the 
extent,  nor  in  the  way  many  suppose.  For  every  bank-note 
issued  by  discount  of  commercial  paper,  an  equivalent  amount 
of  debt  is  created  to  the  bank ;  and  the  demand  for  bank-notes 
to  pay  these  debts  will  be  equivalent  to  the  whole  issue.  The 
parties  so  indebted  must  sell  their  goods,  to  meet  these  pay 
ments,  at  an  advanced  price  if  they  can,  if  not  at  the  best  price 
obtainable.  The  stringency  of  this  necessity  to  meet  engagements, 
which  is  the  more  felt  as  the  advantage  of  maintaining  credit  in 
bank  is  appreciated,  has  oftentimes  defeated  the  object  of  specu 
lators,  and  compelled  them  to  reduce  the  prices  which  they 
hoped  to  raise,  and  thus  to  counteract  the  very  mischiefs  appre 
hended  from  the  increased  circulation.  Large  issues  do  not,  then, 
necessarily  enhance  prices,  but  may  often  be  regarded  as  indica 
tions  of  a  probable  reduction.  The  particular  action  of  men,  or 
the  course  of  trade,  must  always  be  taken  into  view  by  those 
who  desire  to  attain  just  conclusions  in  regard  to  currency,  as 
well  as  prices.  The  same  causes,  under  different  circumstances, 
do  not  always  produce  the  same  results  :  and  their  reasoning,  in 
political  economy,  and  upon  questions  of  commerce,  who  over 
look  human  nature,  and  its  actual  or  probable  action  in  any 
given  circumstances,  cannot  be  of  much  value.  Whatever  be 
longs  to  abstract  science  may  be  explained  by  exhibiting  the 
immutable  laws  of  nature,  or  the  unfailing  processes  of  mechanics, 
or  the  demonstrations  of  mathematics ;  but  that  which  depends 
on  the  minds,  temperaments  and  passions  of  men,  and  the  casual 
occurrences  of  life,  can  never  be  reduced  to  laws  like  those 
which  govern  bees  and  ants ;  neither  can  problems  arising  thus 
be  solved  by  algebraic  formula,  or  any  rule  of  proportion. 


536  COST    OP    PRODUCTION. 

Actual  value,  the  cost  of  production,  and  price,  are  by  no- 
means  equivalent  terms.  Articles  of  trade  are  very  often  sold 
above  or  below  their  actual  value,  and  they  are  often  sold  greatly 
above  or  below  the  cost  of  production ;  but  whether  one  or  the 
other,  that  estimation  at  which  they  are  sold  is  their  actual 
price,  a  term  which  belongs  to  commerce,  and  really  has  no  ab 
solute  or  necessary  connection  with  either  value  or  cost  of  pro 
duction.  The  chief  inquiry  in  the  market  is  as  to  the  price ; 
neither  buyer  nor  seller  knowing,  or  caring  to  know,  the  cost  of 
production.  This,  though  not  equivalent  with  price,  is  an  uni 
versal  and  efficient  element  of  prices.  Other  influences  ceasing, 
prices  must  constantly  tend  to  correspond  with  the  cost  of  pro 
duction,  with  the  expenses  of  transportation  and  sale  added. 
This  centre  about  which  prices  revolve,  is  itself  so  changeable, 
that  no  advantage  is  gained  by  considering  the  subject  in  that 
aspect.  In  truth,  the  cost  of  production  depends  so  much  upon 
prices,  that  the  inquirer  into  the  cost  is  carried  back  into  an  in 
quiry  about  prices,  and  so  the  investigation  turns  in  a  circle. 

Fluctuations  of  prices  arise  from  such  a  variety  of  complex 
and  hidden  causes,  that  no  human  ingenuity  can  disentangle  the 
web.  The  truth  is,  that  even  if  an  analysis  could  be  completed 
at  one  time,  a  similar  state  of  facts  might  never  again  exist,  or, 
existing,  might  not  be  attended  with  the  same  results.  The  same 
men  do  not  always  act  in  the  same  way,  under  the  same  motives. 
Important  changes  of  price  are  constantly  occurring,  which  can 
not  safely  be  assigned  to  any  one  cause  or  to  many ;  and  he  is 
most  prudent,  who  least  suffers  himself  to  indulge  in  positive 
conclusions,  without  means  of  arriving  at  them  or  verifying 
them.  We  should  avoid  the  path  which  leads  to  error,  as  sedu 
lously  as  we  seek  that  which  leads  to  truth. 

To  the  suggestions  we  have  thus  made  on  the  subject  of 
prices,  we  add  one  more.  It  is  well  known,  that  whatever  influ 
ences  may  be  operating  on  the  prices  of  the  chief  commodities 
of  both  foreign  and  domestic  trade,  there  is  a  constant  tendency 
in  these  influences  to  yield  to,  and  be  overborne  by,  others  ema 
nating  from  the  chief  markets  or  points  of  distribution.  What 
ever  may  be  operating  on  the  price  of  cotton  in  Georgia  or 


SENSITIVENESS    OF    PRICES.  537 

Alabama,  is  likely  to  be  overborne  by  other  elements  at  work  in 
New  York.  The  city  of  New  York  is  the  arena  in  which  more 
power  is  exerted  over  prices  than  in  all  the  rest  of  the  coun 
try.  This  is  not  always  the  result  of  design,  or  of  any  special 
movement  among  dealers  in  New  York ;  it  is  more  the  result  of 
the  estimates  made  by  men  outside  of  New  York,  of  what  has 
taken  place,  or  may  take  place  there.  Merchants  and  manufac 
turers  throughout  the  country  know  that  prices  are  mainly  made 
there ;  and  all  turn  their  eyes  thither  for  the  elements  on  which 
to  base  their  calculations.  More  sales  take  place  there  than  at 
any  other  place ;  and  when  sales  are  forced,  they  generally 
occur  there.  These  great  markets  are  subject  to  so  many  con 
tingencies,  both  powerful  and  sudden,  that  those  who  are  in 
terested,  wherever  they  may  reside,  are  obliged  to  watch  these 
causes  and  results  with  great  attention,  that  they  may  avail 
themselves  of  what  is  for  their  benefit,  and  avoid  what  may  be 
for  their  injury.  It  may,  therefore,  and  does  happen,  that  the 
conclusions  and  movements  of  those  residing  out  of  the  great 
marts  of  trade  influence  the  markets  within  them,  in  reference 
to  many  important  articles.  The  resident  merchants  .of  New 
York  may,  therefore,  find  prices  in  the  city  very  much  affected 
by  causes  and  movements  in  which  they  have  been  passive. 

The  general  range  of  prices,  as  it  rests  in  the  minds  of  the 
body  of  dealers,  is  one  of  the  most  sensitive  things  in  the  world. 
Like  the  ocean,  the  least  breath  of  wind  from  any  quarter  will 
ruffle  the  surface ;  and  it  requires  but  a  breeze  of  demand  or 
speculation  to  set  the  whole  in  rapid  movement,  if  not  wild  com 
motion,  the  result  and  termination  of  which  none  can  for  a  time 
conjecture.  One  of  the  results  often  observed,  in  regard  to 
prices,  is  the  vast  disproportion  between  causes  and  results. 
When  harvests  are  abundant,  even  a  little  beyond  the  average, 
the  price  of  the  whole  product  may  be  diminished  so  as  to  reduce 
the  sum  received  for  the  whole  by  an  amount  many  times 
the  value  of  the  surplus.  So,  if  harvests  are  short,  the  product 
often  sells  for  more  than  if  they  were  abundant.  It  is  the  same 
with  supplies  by  foreign  importation ;  a  very  little  over-trading 
may  affect  the  prices  of  a  large  stock  of  commodities  so  seriously, 


538  QUANTITY    OF    MONEY  —  PRICES. 

as  to  cause  heavy  losses.  If  we  suppose,  for  instance,  that  the 
stock  of  iron  in  New  York,  and  within  the  influence  of  its  mar 
ket,  to  be  at  any  time  worth  $1,000,000,  at  prices  upon  which 
a  regular  business  and  consumption  is  proceeding,  the  sudden 
arrival  from  abroad  of  §50,000  worth,  or  only  five  per  cent,  of 
the  quantity  on  hand,  may  so  disturb  the  market,  that  pur 
chasers  may  refrain  from  buying  for  a  time,  and  sellers  may 
become  alarmed  and  desirous  of  realizing  before  an  expected 
fall;  a  decline  of  prices  to  the  extent  of  ten  per  cent,  on 
the  whole  stock  may  occur,  and  a  loss  of  $100,000  thus  fall 
upon  the  holders  of  the  iron,  or  double  the  amount  of  the  im 
portation.  Every  observer  of  the  great  markets  can  recall 
instances  of  a  similar  kind,  which  show  how  difficult  it  is  to 
ascertain  the  causes  which  determine  the  range  of  prices.  It  is 
often,  however,  as  easy  to  see  that  fluctuations  are  attributed  to 
wrong  sources,  as  it  is  difficult  to  assign  the  true  causes. 

§  2.  The  effect  upon  prices  of  the  quantity  of  money  —  The  theory  of  Mon 
tesquieu  acceded  to  by  Hume,  Locke,  and  Harris ;  denied  by  Sir  James 
Stewart,  Adam  Smith,  Lauderdale,  Malthus,  Ricardo,  Torrens,  M'Cul- 
loch  —  James  Mill  —  Prices  are  not  coins,  but  expressions  of  money  of 
account  —  Wholesale  must  mainly  control  retail  prices ;  the  former  made 
upon  credit  —  Propositions  of  Lauderdale  —  Malthus  cited — Also  Torrens 
— M'Culloch — Maltlms —  Conviction  of  opinions  —  Marquis  Gamier  cited 
—  Adam  Smith  cited —  Ganihl  cited  —  Humboldt's  proportion  of  gold  to 
silver  —  Jacob  on  precious  metals  —  Rise  of  pi-ices  not  in  proportion  to  the 
increase  of  money  —  Arthur  Young's  Inquiry  into  the  Progressive  Value  of 
Money  —  Tables  of  prices  in  Spain  —  Beaives  on  Spain  —  Prices  of 
wheat  in  France. 

If  the  reader  bears  in  mind  the  vast  variety  and  power  of 
those  elements  which  operate  upon  prices,  to  which  we  have 
in  part  referred,  he 'will  be  prepared  to  consider  the  influences, 
in  this  respect,  of  an  increase  or  diminution  of  money.  What 
ever  the  latter  may  be,  the  others  are  in  full  activity;  their 
operation  does  not  cease,  though  other  forces  are  brought  into 
conjunction  or  opposition.  Whatever  inherent  difficulty  there 
may  be,  therefore,  in  the  subject,  must  be  much  increased  by 
confining  the  view  to  money  as  the  chief  cause  of  fluctuations  in 


PROPORTION    OF    MONEY    TO     PRICES.  539 

prices.  It  is  manifest  that  no  one  can  ascertain  to  what  extent 
fluctuation  of  prices  is  due  to  changes  in  the  quantity  of  money, 
until  he  can  measure  the  effect  of  other  influences.  If  this  can 
not  be  done,  no  conclusions  can  be  safely  drawn  ;  if  it  can  be 
done  only  conjeeturally,  then  conclusions  resting  upon  such  a 
basis  must  be  subject  to  the  contingencies  of  the  conjecture. 
Whatever  bears  upon  the  subject  of  prices,  whatever  degree  of 
uncertainty  hangs  over  all  branches  of  the  inquiry,  must  be 
taken  into  account  when  the  influence  of  money  in  these  changes 
comes  to  be  considered. 

A  prevailing  inclination  has  long  existed  to  establish  a  pro 
portion  between  the  quantity  of  money  in  the  world  and  the 
quantity  of  all  other  commodities,  and  to  make  that  proportion 
the  rule  of  prices.  This  plausible  idea  is  very  likely  to  have 
occurred  to  such  thinkers  as  had  very  little  practical  knowledge 
of  commerce.  Montesquieu  very  unhesitatingly  gave  it  the 
sanction  of  his  high  authority,  and  it  has  had  the  circulation  of 
his  popular  work1  "  Si  Ton  compare  la  masse  de  For  et  de 
1'argent  qui  est  dans  le  monde,  avec  la  somme  des  marchandises 
qui  y  sont,  il  est  certain  que  chaque  denree  ou  marchandise  en 
particulier  pourra  etre  comparde  &  une  certaine  portione  de  la 
masse  entiere  de  Tor  et  de  1'argent.  Comme  le  total  de  1'une 
est  au  total  de  1'autre,  la  partie  de  1'une  sera  a  la  partie  de 
1'autre."  After  an  illustration  drawn  from  the  supposition  of 
there  being  only  one  article  of  commerce,  and  one  individual  to 
purchase  it,  he  concludes :  "  Les  prix  se  fixeront  en  raison  com- 

1  "  If  we  compare  the  mass  of  gold  and  silver  in  the  world  with  the*whole 
of  the  commodities,  it  is  certain  that  every  commodity  in  particular  may 
be  compared  with  a  certain  portion  of  the  entire  mass  of  gold  and  silver. 
As  the  whole  of  the  one  is  to  the  whole  of  the  other,  a  portion  of  one  will 
be  to  a  portion  of  the  other."  .  .  yo* 

.  .  .  "  Prices  are  fixed  at  a  rate  compounded  of  the  whole  of  the  com 
modities  with  the  whole  of  the  signs,  and  of  that  of  the  whole  of  the  com 
modities  in  the  channels  of  trade  with  the  whole  of  the  signs'7  (gold  and 
silver)  "  employed  as  money/7 

"The  establishment  of  prices  depends  always  fundamentally  upo-n  the 
proportion  of  the  total  of  the  commodities  to  the  to-tal  of  the  signs." — Spirit 
of  Laws,  book  22,  chap.  vii. 


540  MONTESQUIEU,    HUME,    AND    LOCKE. 

posde  du  total  des  choses  avec  le  total  des  signcs,  et  de  celle  du 
total  des  choses  qui  sont  dans  le  commerce  avec  le  total  des 
signes  qui  y  sont  aussi.  .  .  .  L'etablissement  du  prix  des 
choses  depend  toujours  fondamentalement  de  la  raison  du  total 
des  choses  au  total  des  signes."  1  This  algebraic  formula  grap 
pled  the  mind  of  Hume ;  but,  though  it  hindered  the  progress 
of  his  investigation,  did  not  prevent  his  obtaining  glimpses  of 
the  truth.  We  find,  in  his  "Essay  on  Money,"  many  sound 
and  original  views.  Locke  had  nearly  the  same  impediments  in 
his  way  on  the  subject  of  prices.  So  simple  and  complete  does 
this  theory  of  prices  seem,  and  so  plausibly  has  the  idea  been 
presented  by  Montesquieu,  and  many  others  since  his  day,  that 
we  find  it  cleaving  to  men's  minds,  in  whole  or  in  part,  from  that 
to  the  present  time. 

So  much  is  it  to  be  lamented,  when  men  of  that  stamp  lend 
their  intellect  and  popularity  to  the  propagation  of  error !  It  is 
in  vain  that  others,  less  distinguished,  point  out  errors  of  fact 
and  doctrine ;  their  works  are  forgotten,  while  those  of  such 
men  flourish  in  constant  vigor.  The  same  sophism  which,  a  cen 
tury  ago,  misled  the  readers  of  the  "  Spirit  of  Laws,"  the  papers 
of  the  "  Spectator,"  and  the  "Essays"  of  Hume  and  Locke  on 
money,  commits  the  same  mischiefs,  with  equal  success,  at  the 
present  time.  Harris,  in  an  "Essay  upon  Money  and  Coins," 
published  only  a  few  years  after  the  "  Spirit  of  Laws,"  a  writer 
of  far  more  practical  knowledge  than  either  of  the  distinguished 
men  above  mentioned,  was  wholly  unable  to  surmount  the  theory 
of  Montesquieu,  and  adopts  it  broadly,  though  evidently  contra 
dicted  and  disproved  by  many  of  his  own  positions. 

But  this  fanciful  proposition  was  not  sent  to  the  world  without 
being  early  contradicted.  It  was  very  soon  severely  questioned 
and  overthrown  by  a  writer  upon  political  economy,  who  will  be 
hereafter,  as  we  trust,  better  appreciated  than  has  yet  been  his 
lot.  Sir  James  Stewart,  to  whom  we  refer,  sums  up  this  false 
theory,  as  he  found  it  in  various  authors,  thus :  — 

"First.  The  prices  of  commodities  are  always  proportioned 


L'Esprit  du  Lois,  livre  xxii.  chap.  vii. 


SIR    JAMES    STEWART.  541 

to  the  plenty  of  money  in  a  country.  So  that  the  augmentation 
of  wealth  even  fictitious,  such  as  paper,  affects  the  state  of  prices 
in  proportion  to  its  quantity. 

"  Second.  The  coin  and  current  money  in  a  country  is  the 
representative  of  all  the  labor  and  commodities  of  it.  So  that, 
in  proportion  as  there  is  more  or  less  of  this  representation 
(money),  there  goes  a  greater  or  less  quantity  of  the  thing 
represented  (commodities)  to  the  same  quantity  of  it.  Thence 
it  follows  — 

"  Third.  Increase  commodities,  they  become  cheaper ;  in 
crease  money,  they  rise  in  their  value. 

"  Nothing,"  he  says,  "  can  be  more  beautiful  than  these 
ideas.  But  upon  a  close  examination  of  these  three  propositions, 
I  am  forced  to  range  this  ingenious  exposition  of  a  most  interest 
ing  subject  among  those  general  and  superficial  maxims  which 
never  fail  to  lead  to  error."  l 

The  more  celebrated  political  economists  of  Great  Britain  who 
came  after  Stewart  entertained  theories,  on  the  subject  of  prices, 
quite  at  variance  with  the  idea  of  an  adjustment  proportioned  to 
the  quantity  of  money.  Adam  Smith,  Lauderdale,  Malthus, 
Ricardo,  Torrens,  and  M'Culloch,  has  each  his  own  theory, 
or  a  peculiar  mode  of  explaining  the  doctrines  of  others.  Of 
the  more  known  British  economists,  James  Mill  is  the  only  one 
who  has  fallen  into  the  errors  above  noted  ;  and  he  felt  himself 
obliged  to  add  an  explanation,  which  forcibly  exhibits  the  ab 
surdity  of  this  summary  method  of  adjusting  prices.  Unfortu 
nately,  however,  for  the  truth,  this  inclination  to  algebraic  pro 
positions  and  illustrations  clings  to  a  whole  class  of  political 
economists  —  a  school  of  philosophers  much  more  bent  on  found 
ing  a  science,  than  on  studying  human  nature,  human  institu 
tions,  or  human  happiness. 

But  the  prevalent  belief  in  the  theory  of  Montesquieu  was  not 
the  only  ground  for  the  common  error  on  the  subject  of  the  rela 
tion  between  money  and  prices.  It  is  taken  for  granted  too 
generally,  that  prices  are  the  naming  of  so  many  pieces  of 

1  Inquiry  into  the  Principles  of  Political  Economy,  book  2,  chap,  xxviii. 


542  PRICES    ARE    NOT    COINS. 

money,  coins,  or  parts  of  coins ;  that  the  naming  of  a  price  is 
an  occurrence  always  connected  with  a  sale ;  that  the  seller  is 
present  with  a  commodity,  and  the  buyer  with  the  coins,  and  the 
question  to  be  settled  between  them  is  how  many  of  the  coins 
are  to  go  for  the  commodity  ;  that  a  virtual  barter  is  thus  insti 
tuted  of  gold  or  silver,  in  the  shape  of  coins,  for  some  other 
commodity ;  and  that  the  prices  of  commodities  are  the  number 
of  coins  which  are  asked  for  a  certain  portion  of  each  article. 
If  this  were  the  case,  it  would  very  probably  come  to  pass  that 
a  relation  or  proportion  would  arise  between  the  quantity  of 
commodities  and  the  quantity  of  coins,  more  or  less  definite. 
But  as  any  approximation  to  such  a  mode  of  dealing  only  exists 
among  uncivilized  people ;  as  every  commodity  is  subject  to 
fluctuations  of  price,  depending  upon  causes  and  influences  pecu 
liar  to  itself;  and  as  commodities  in  general  are  subject  to 
changes  in  price,  from  causes  in  no  respect  connected  with  the 
quantity  of  money,  there  is  no  close  nor  invariable  connection 
between  prices  and  the  quantity  of  coins.  It  is  a  great  mistake 
to  suppose  that  prices  are  chiefly  made,  discussed  and  settled  in 
the  cases  of  actual  purchases.  Prices  are  named,  expressed  and 
discussed  a  hundred-fold  more  than  actual  sales  take  place. 
They  are  the  subject  of  a  vast  deal  of  conversation  and  con 
ference,  when  no  sale  is  contemplated.  There  is  scarcely  any 
topic  among  circles  of  business  men,  from  the  lowest  range  of 
the  retail  dealing  to  the  largest  transactions  of  trade,  more  dis 
cussed  than  prices,  apart  from  any  contracts  or  sales.  What 
ever  influence  the  quantity  of  money  in  a  country  may  have  on 
prices,  it  is  far  less  in  the  thoughts  of  those  who  fix  prices,  and 
far  less  influential  than  those  causes  which  operate  directly  on 
the  article  of  which  the  price  is  to  be  fixed. 

Whilst  the  quantity  of  money  in  a  country  may  be  one  of  the 
most  general  causes  operating  on  prices,  because  it  must  operate 
over  the  whole  range  of  commodities,  it  is  one  of  the  least  influ 
ential,  one  whose  effects  are  the  most  difficult  to  detect  and 
point  out. 

In  civilized  communities,  where  the  credit  system  is  in  active 
operation,  general  prices  are  mainly  governed  by  those  which 


PRICES    NOT    DEPENDENT    ON    MONEY.  543 

prevail  in  large  transactions.  For  with  all  the  complication  of 
influences  which  bear  upon  them,  the  actual  prices  fixed  in  the 
wholesale  operations,  which  always  precede  the  lesser  move 
ments  of  retail,  must  control  the  latter.  The  retail  dealer  must 
be  governed,  in  his  selling  prices,  by  his  purchasing  prices. 
The  prices  made  by  the  larger  transactions  of  trade  become 
more  extensively  known,  and  thus  exert  a  controlling  influence. 
We  have  seen  that  the  larger  transactions  of  trade  are  almost 
exclusively  carried  on  by  means  of  credit ;  that  is,  the  purchases 
and  sales  are  made  upon  credit ;  the  dealers  purchase  with  their 
own  paper  upon  time ;  they  sell,  and  take  the  paper  of  others 
upon  time  ;  the  payments  accruing  on  this  paper  are,  on  both 
sides,  adjusted  through  the  banks,  without  any  use  of  money  or 
coins.  Money,  in  these  cases,  has  nothing  to  do  with  the  prices, 
and  nothing  to  do  with  the  payments.  The  parties  to  this  trade 
have  very  little  occasion  to  think  of  the  precious  metals  in  any 
connection  with  their  business,  and  perhaps  not  at  all,  unless  a 
run  upon  the  banks  diminishes  their  usual  facilities  of  adjust 
ment. 

In  the  large  department  of  trade  which  is  called  wholesale, 
the  quantity  of  money  in  a  country  has  nothing  to  do  with 
prices  ;  it  is  not  thought  of;  the  parties  are  not  dependent  upon 
any  considerations  of  that  kind.  The  condition  of  the  banks,  or 
dealers  in  credit,  is  considered,  but  not  the  plenty  or  scarcity 
of  money  in  the  country.  This  view  of  the  subject,  when  fully 
apprehended,  disposes  very  effectually  of  the  position  taken  by 
Montesquieu,  and  those  who  have  embraced  his  views. 

The  persons  who  adopted  these  views  always  believed  that 
prices  were  expressed  in  coins,  and  that  naming  a  price  was 
equivalent  to  holding  up  coins  which  would  pay  that  price.  We 
have  seen,  in  the  chapter  on  money  of  account,  that  this  is  not 
so;  that,  in  civilized  communities,  prices  are  always  expressed 
in  the  prevailing  money  of  account ;  and  that  this  is  an  invaria 
ble  and  unavoidable  mental  habit  among  a  people  conversant 
with  the  simplest  rules  of  arithmetic.  Such  a  people  not  only 
invariably  form  a  money  of  account,  by  which  they  express  all 
prices,  but  they  carry  in  their  minds,  with  equal  facility,  the 


544  PRICES    AND    MONEY    OF    ACCOUNT. 

quantities  denoted  by  a  great  number  of  weights  and  measures, 
as  tons,  pounds,  ounces,  gallons,  yards,  feet,  inches,  acres,  and 
miles ;  and  they  understand  each  other  perfectly,  in  the  use  of 
these  terms,  although  no  mode  of  verification  is  at  hand.  As, 
when  persons  speak  of  pounds  and  ounces,  they  mean  ascertained 
and  understood  quantities,  and  not  pound  or  ounce  weights 
merely  :  so,  when  they  speak  of  francs,  or  shillings,  or  dollars, 
they  mean  ascertained  and  understood  values,  and  not  merely 
the  material  coin  bearing  those  names.  They  express  them 
selves  as  men  did  in  England  before  the  sovereign  was  intro 
duced,  when  they  spoke  of  pounds  sterling.  There  was  no  such 
coin  as  a  pound  sterling ;  and  yet  they  understood  one  another 
as  well  as  men  do  now,  when  they  speak  of  sovereigns.  In  our 
colonial  times,  prices  were  all  expressed  in  the  different  colonial 
moneys  of  account ;  that  is,  in  pounds,  shillings  and  pence,  as 
these  terms  were  understood  in  the  different  colonies.  There 
were  no  coins  corresponding  to  these  moneys  of  account,  and 
there  never  had  been.  Yet  there  was  no  difficulty  in  expressing 
prices  in  moneys  of  account ;  and  in  the  interior  of  Virginia  and 
Massachusetts,  the  people  cling,  even  now,  to  these  old  modes 
of  expressing  prices.  This  mode  of  naming  prices,  which  is  uni 
versal  in  civilized  nations,  also  effectually  disposes  of  the  notion 
of  Montesquieu.  Prices  are  absolutely  independent  of  coins, 
both  for  expression  and  payment.  Coins  are  thus  reduced  to 
their  true  place  of  a  commodity,  bearing  the  stamp  of  the  govern 
ment  as  to  quantity  and  quality  —  a  commodity,  also,  which  the 
law  makes  the  standard  of  payment,  where  parties  cannot  agree 
upon  any  other  mode.  There  is,  then,  so  little  occasion  to  think 
of  or  refer  to  coins  in  the  matter  of  prices,  that  when  there  is  no 
disturbance  in  the  banking  or  credit  system,  there  is  no  element 
of  prices  which  exercises  less  influence  than  the  quantity  of 
money. 

The  idea,  however,  that  the  quantity  of  money  and  prices 
have  some  necessary  and  precise  relation  has  prevailed  so  exten 
sively,  and  still  occupies  so  many  minds,  that  we  shall  not  leave 
the  subject  without  reference  to  the  positions  taken  by  some  of 
them.  We  cannot  but  think  that  the  best  refutation  of  some  of 


PRICES  —  LAUDERDALE.  545 

these  doctrines  is  to  give  the  reader  a  few  specimens.  Their 
absurdity  becomes  more  glaring,  the  closer  they  stand  in  array. 

"When,"  says  Lauderdale,  "we  express  the  value  of  any 
commodity,  it  may  vary  at  one  period  from  what  it  is  at  another, 
in  consequence  of  eight  different  contingencies  :  — 

"  First.  It  would  be  subject  to  an  increase  of  its  value,  from 
a  diminution  of  its  quantity. 

"  Second.  To  a  diminution  of  its  value,  from  an  augmentation 
of  its  quantity. 

"  Third.  It  might  suffer  an  augmentation  in  its  value,  from 
the  circumstance  of  an  increased  demand. 

"  Fourth.  Its  value  might  be  diminished,  by  a  failure  of 
demand. 

"  When,  in  common  language,  therefore,  we  express  the  value 
of  any  commodity,  it  may  vary  at  one  period  from  what  it  is  at 
another,"  not  only  for  the  four  reasons  just  mentioned,  but  for 
four  corresponding  reasons,  "  in  relation  to  the  commodity 
adopted  as  a  measure  of  value :"  that  is  :  — 

"  Fifth.  The  commodity,  money,  will  be  increased  in  value  if 
the  quantity  is  diminished. 

"  Sixth.  It  will  be  diminished  in  value  if  increased  in  quantity. 

"  Seventh.  It  may  be  augmented  in  value  by  an  increased 
demand.  Or, 

"Eighth.  Diminished  in  value  by  failure  of  demand:  and 
prices  may  be  affected  accordingly. 

"  It  follows  that  the  variation  of  all  value  must  de 
pend  upon  the  alteration  of  the  proportion  betwixt  the  demand 
for,  and  the  quantity  of,  the  commodity,  occasioned  by  the 
occurrence  of  one  of  the  four  circumstances  above  stated ;  and 
that  a  variation  in  the  expression  of  value  may  be  occasioned  by 
the  occurrence  of  any  of  the  eight  circumstances  we  have 
alluded  to."1 

j-?j^"  -v-  •  "  In  every  instance  of  bargain  and  sale,"  says  Mal- 
thus,  "  it  will  be  perfectly  correct  to  say,  that  the  prices  of 
commodities  will  depend  upon  the  relation  of  the  demand  to  the 

1  Lauderdale  on  Public  Wealth,  chap.  i.  pp.  12,  59. 
35 


546        TORRENS,     M'CULLOCH,     AND    MALT  II  US. 

supply ;  or  will  vary  as  the  demand  (that  is,  the  money  ready 
to  be  offered)  directly,  and  the  supply  inversely."  And  again  : 
"  In  reality,  prices  are  determined  by  the  demand  in  posse,  com 
pared  with  the  supply  in  esse."1 

Col.  Torrens  resolves  the  whole  question  of  prices  into  one  of 
effectual  demand;  yet,  in  the  course  of  an  elaborate  explana 
tion,  he  uses  the  following  language,  which,  by  itself,  would  rank 
him  as  a  believer  in  the  theory  of  Montesquieu  :  — 

"  In  all  ordinary  states  of  the  market,  prices  will  be  deter 
mined  by  the  proportion  which  exists  between  the  quantity  of 
commodities  to  be  circulated  and  the  amount  of  the  currency 
with  which  their  circulation  is  effected ;  and  to  occasion  a  gene 
ral  fall  or  rise  of  prices,  the  quantity  of  commodities  must  in 
crease  or  diminish,  while  the  amount  of  the  currency  remains 
the  same,  or  the  amount  of  the  currency  must  increase  or  dimi 
nish,  while  the  quantity  of  commodities  remains  the  sarne.": 

The  cost  of  production  is  the  guiding  star  of  Ricardo  and 
M'Culloch,  the  only  clue  on  this  mazy  subject  of  prices.  "  If 
the  cost  of  production  be  diminished,  price  will  be  equally  dimi 
nished,  though  the  demand  should  be  increased  to  any  consider 
able  extent.  If  the  cost  of  production  be  increased,  price  will 
be  equally  increased,  though  the  demand  should  sink  to  the 
lowest  possible  limit."3 

When  such  men  mistake  the  boundaries  of  a  subject  in  which 
they  profess  to  be,  and  are  deemed,  specially  skilled,  the  cur 
sory  reader  should  be  on  his  guard.  No  department  of  political 
economy,  and  least  of  all  that  of  prices,  can  be  disposed  of  in 
this  off-hand  mode.  Although  Malthus  indulges  in  it  with  the 
others,  he  was  able  sometimes  to  perceive  its  inappropriateness. 

Mr.  Malthus  had  previously,  in  the  first  paragraph  of  the 
Introduction  to  his  "Political  Economy,"  given  his  readers  the 
following  caution,  than  which  nothing  more  wise  is  to  be  found 
in  any  work  on  that  subject :  —  "  Yet  we  should  fall  into  serious 


1  Principles  of  Political  Economy,  chap.  ii.  \  2. 

2  Essay  on  Wealth,  page  419. 


3  Principles  of  Political  Economy,  by  M'Culloch,  part  ii.  chap.  ii.  pp. 
255,  333,  edition  of  1849. 


PRICES  —  ALGEBRAIC    FORMULA.  547 

error,  if  we  were  to  suppose  that  any  propositions,  the  practical 
result  of  which  depends  upon  the  agency  of  so  variable  a  being 
as  man,  and  the  qualities  of  so  variable  a  compound  as  the  soil, 
can  ever  admit  of  the  same  kind  of  proofs,  or  lead  to  the  same 
certain  conclusions  as  those  which  relate  to  figure  or  number." 
uBut  even  these  (the  great  general  principles  of  political 
economy)  will  be  found  to  resemble,  in  most  particulars,  the 
great  general  rules  in  morals  and  politics  founded  on  the  known 
passions  and  propensities  of  human  nature  :  and  whether  we  ad 
vert  to  the  qualities  of  men,  or  of  the  earth  he  is  destined  to 
cultivate,  we  shall  be  compelled  to  acknowledge  that  the  science 
of  political  economy  bears  a  nearer  resemblance  to  the  science 
of  morals  and  politics,  than  to  that  of  mathematics." 

It  is  because  this  mode  of  thinking,  and  this  form  of  expres 
sion,  has  a  specially  misleading  tendency,  that  we  bring  them 
thus  prominently  and  fully  before  the  reader :  it  should  not  re 
quire  much  reflection  to  conclude  that  current  prices  are  not 
the  subject  of  algebraic  formulas.  Almost  all  that  regards  prices 
must  be  deduced  from  careful  observation ;  from  careful  com 
parison  of  the  present  with  the  past ;  and,  after  all,  approxima 
tions  may  be  all  that  is  attainable.  It  is  less  in  our  power  to 
reach  arithmetical  certainty  in  regard  to  fluctuation  of  prices  in 
general,  than  it  is  for  individuals  to  reach  it  in  their  own  busi 
ness.  A  wide  and  irreconcilable  difference  of  opinion  has  long 

1  See  also  p.  134,  chap.  ii.  §  7  ;  Gamier  de  la  Monnaie,  torn.  i.  p.  39  ; 
Say  on  Political  Economy,  p.  295,  6th  American  edition. 

This  positive  and  arithmetical  mode  of  expression,  to  which  Malthus 
objects,  prevailed  extensively  among  the  political  economists  on  the  conti 
nent,  as  well  as  in  Great  Britain  ;  and  examples  might  be  cited  at  once 
curious  and  instructive.  Its  misleading  tendencies  were  strongly  denounced 
by  Gioja,1  vrho  loses  no  opportunity,  in  his  elaborate  work,  of  placing 
his  condemnation  upon  such  opinions.  One  of  the  most  flagrant  instances 
we  have  met  with  occurs  in  "  Principes  d'Economie  Politique,  par  N.  F. 
Canard,"  crowned  by  the  French  Institute  in  the  year  1801,  in  which  the 
whole  subject  of  prices  is  adjusted  and  settled  by  the  most  elaborate  alge 
braic  propositions,  worked  out  at  length,  and  the  results  given.  See  pages 

1  Nuovo  Prospetto  delle  Scienze  Economiche,  vol.  ii.  p.  160. 


548  PRICES  —  SOLUTION    BY    ALGEBRA. 

prevailed  between  writers  upon  political  economy,  on  the  subject 
of  prices.  No  real  progress  was  made  towards  a  proper  treat- 

28  to  61,  and  161  to  165.  We  shall  endeavor  to  abridge  the  problem  at 
page  28. 

"  The  sellers  and  purchasers  having  met  in  market,  there  will  of  course 
be  a  difference  between  the  price  asked  and  the  price  offered.  This  differ- 
once,  from  the  highest  to  the  lowest  price,  will  form  a  range  within  which 
the  struggle  between  the  sellers  and  purchasers  must  take  place.  The  first 
will  avail  themselves  of  all  their  advantages  — that  is,  of  the  wants  and  the 
competition  of  the  purchasers  —  and  the  purchasers  will  profit,  on  their 
part,  by  the  wants  of  sellers  and  their  competition ;  and  each  party  will  try  to 
bring  the  other  to  that  point  in  the  range  of  most  advantage  to  themselves. 

'*  This  being  fixed,  let  It  be  that  range,  x  that  part  of  the  range  which 
sellers  wish  to  add  to  the  lowest  price ;  R — x  will  be  the  portion  which 
purchasers  wish  to  deduct.  Let  P  be  the  wants  of  purchasers,  C  their  com 
petition  ;  p  the  wants  of  sellers,  c  their  competition. 

"It  is  clear  that  the  portion  x,  of  the  range  paid  by  purchasers,  will  in 
crease  in  proportion  to  their  wants  and  their  competition :  x  will  then  be 
at  the  compound  rate  of  P  and  C,  or  will  increase  as  P  C ;  for  the  same 
reason,  the  other  part,  It — x  will  increase  as  pc :  this  will  give  the  propor 
tion,  x  :  PC  : :  It  —  x  :  pc,  which  gives  the  equation,  pcx  =  P  C  (It — x}. 
In  this  equation,  the  quantity  pc,  the  wants  and  the  competition  of  the 
sellers,  gives  the  power  of  the  purchasers ;  and  the  quantity  P  C,  the  wants 
and  competition  of  the  purchasers,  gives  the  power  of  the  sellers.  So  the 
power  of  the  purchasers  multiplied  by  that  portion  of  the  range  which  the 
sellers  make  them  pay,  is  equal  to  the  power  of  the  sellers  multiplied  by 
the  other  portion  of  the  range  which  the  purchasers  throw  back  upon 
them. 

"  This  equation,  which  I  shall  call  the  equation  of  determination,  expresses 
the  equality  of  each  momentum  of  the  two  opposed  powers,  which  make 
the  equilibrium.  It  is  to  the  princ;ple  of  the  equilibrium  of  these  two 
powers  that  belongs  the  whole  theory  of  political  economy  ;  as  it  is  to  the 
principle  of  the  equilibrium  of  the  lever  that  belongs  all  the  theory  of 

mechanics. 

p  (7 

"  From  this  equation  it  follows,  x  —       n         —  P.     If  we  make  pc  =  0, 

1  C  -\-  p  c 

we  have  x  —  It ;  that  is,  if  the  competition  of  sellers  is  nothing,  or  if  their 
necessity  of  selling  is  the  smallest  possible,  the  purchasers  will  pay  all  the 
range.  If,  on  the  contrary,  we  make  PC  =  0,  we  have  x  =  0;  that  is 
to  say,  if  the  competition  or  the  necessities  of  purchasers  is  the  smallest 
possible,  they  will  pay  none  of  the  range :  hence  it  follows,  that  the  range 
is  the  difference  between  the  highest  and  lowest  price,  which  means  be 
tween  the  monopoly  of  the  sellers  and  the  opposing  monopoly  of  the  pur 
chasers." 


ALGEBRA    INAPPLICABLE    TO    PRICES.          549 

ment  of  the  subject,  until  the  appearance  of  "  Tooke's  History 
of  Prices/' 

If  we  supposed  further  exemplifications  of  algebraic  political  economy 
were  necessary  to  nauseate  the  reader,  we  might  furnish  other  specimens 
from  the  famed  Beccaria,  or>  the  less  known  Aggazini  and  Schmalz.  It 
cannot,  however,  surely  be  necessary  to  prove  that  such  reasoning  is  inap 
plicable  to  the  subject.  As  well  might  it  be  applied  to  the  operations  of 
the  affections  and  passions,  to  the  efforts  of  the  intellect,  to  the  exertion  of 
bodily  strength,  and  to  the  changing  forms  of  disease.  Moralists  might  tell 
us  that  love  diminished  in  proportioa  to  the  squares  of  the  distances ;  that 
our  appetites  were  strong,  directly  as  the  demand,  and  inversely  as  the  sup 
ply,  of  the  gratifications  desired  ;  that  mental  efforts  would  be  powerful,  in 
exact  proportion  to  the  culture  applied,  and  weak  in  exact  proportion  to 
the  neglect  of  culture  ;  that  bodily  strength  would  be  manifested  according 
to  the  length  and  breadth  of  the  muscle  exerted.  We  should  not  thus  have 
dwelt  upon  this  fallacious  mode  of  reasoning,  but  that  it  is  constantly 
repeated ;  it  meets  us,  in  this  country,  in  nearly  every  summary  of  politi 
cal  economy  which  has  appeared.  It  is  repeated  incessantly  in  the  public 
journals ;  and  some  of  the  sweeping  conclusions  we  have  noticed  are  de 
livered  from  mouth  to  mouth,  as  if  they  no  more  admitted  contradiction 
than  that  two  and  two  make  four.  It  is  in  vain  they  are  refuted  and  shown 
to  be  false  or  deceptive;  the  disease  prevails.,  and  the  remedy  is  forgotten. 
The  following  is  from  a  popular  treatise  published  in  1837,  in  New  York : 

"Other  things,"  then,  being  equal  — 

•'  The  greater  the  supply,  the  less  the  exchangeable  value. 

•"The  less  the  supply,  the  greater  the  exchangeable  value. 

"  The  greater  the  demand,  the  greater  the  exchangeable  value. 

"  The  less  the  demand,  the  less  the  exchangeable  value. 

"And,  in  general,  cost  being  fixed,  exchangeable  value  is  inversely  as  the 
supply,  and  directly  as  the  demand. 

"And  exchangeable  value  will  be  as  the  cost  plus  the  effect  produced  by 
the  variation  in  supply  and  demand."  ' 

The  qualification  of  other  things  being  equal  may  save  these  propositions 
from  being  absolutely  false,  but  it  reduces  them  to  absurdity,  because  oilier 
things  never  can  be  equal,  while  every  thing  that  affects  prices  is  eminently 
variable.  It  is  strange  that  men  of  acute  and  well-disciplined  minds  can 
deal  in  dogmas,  of  which  their  own  more  detailed  doctrines,  if  taken  in 
their  proper  breadth,  furnish  ample  refutation.  In  1838,  a  treatise  was 
published  in  Philadelphia,  in  which  we  find  it  broadly  stated  that  — 

"  The  effect  on  prices  of  the  supply  of  money,  or  the  demand  for  it  be 
coming  greater  or  less,  is  to  cause  them  to  rise  or  fall  in  the  same  propor- 

1  Wayland's  Elements  of  Political  Economy,  page  13. 


550  EFFECT    OF    QUANTITY    ON     PRICES. 

Some  of  their  differing  opinions  have  been  exhibited  in  the 
preceding  quotations.  From  Sir  James  Stewart,  however,  to 
M'Culloch,  the  leading  authors  advance  theories,  on  the  subject 
of  prices,  wholly  at  variance  with  the  above  cited  opinions  of 
Montesquieu,  Locke  and  Hume.  Whatever  be  their  want  of 
agreement  among  themselves,  or  of  individual  consistency,  they 
generally  admit  that  money  or  bullion  is  subject  to  similar  varia 
tions  in  price  with  other  articles  of  commerce,  under  the  in 
fluence  of  the  same  causes.  Adam  Smith  says  :  —  "  The  occa 
sional  fluctuations  in  the  market  price  of  gold  and  silver  arise 
from  the  same  causes  as  the  like  fluctuations  in  that  of  all  other 
commodities."1  If  this  be  correct,  the  price  of  these  metals 
cannot  be  adjusted  upon  the  single  element  of  their  quantity. 

Even  Harris2  and  James  Mill,  who  maintain  that  the  value 
of  money  is  regulated  by  its  quantity,  advance  opinions  quite 
inconsistent  with  this  notion.  The  former,  in  his  first  chapter, 
clearly  recognizes  the  influence  of  labor,  skill,  &c.,  and  of 
supply  and  demand,  in  determining  prices.  The  latter  thus 
sums  up  an  elaborate  argument  on  this  topic :  — "  It  thus 
appears,  by  the  clearest  evidence,  that  the  quantity  of  labor,, 
in  the  last  resort,  determines  the  proportion  in  which  com 
modities  exchange  for  one  another/' 3  The  quantity  of  labor 
expended,  the  cost  of  production,  the  operation  of  supply  and 
demand,  with  various  modifications,  explanations  and  additions, 
are  the  elements  which  nearly  all  the  celebrated  writers  upon 

Hon.  So  long  as  the  necessities  and  desires  of  men  remain  unaltered,  will 
the  money  actually  circulating  be  applied  to  the  procuring  of  the  very  same 
commodities.  If  the  circulating  medium  be  doubled,  the  price  of  every 
thing  will  be  doubled ;  and  the  like,  in  whatever  other  ratio  that  medium 
may  be  supposed  to  have  increased,  or  in  whatever  ratio  it  be  supposed  to 
have  diminished." ' 

This  doctrine  is  nearly  identical  with  that  of  Locke,  Montesquieu  and 
Hume  ;  and  shows,  conclusively  enough,  the  influence  of  false  teaching, 
when  wielded  by  men  of  such  reputation  and  power. 

1  M'Culloch's  edit.  p.  21. 

8  Principles  of  Political  Economy,  by  II.  Vethake,  LL.D.,  p.  47. 

3  Elements  of  Political  Economy,  by  James  Mill,  p.  74 ;  see  also  p.  95. 

*  Essay  on  Coins. 


MARQUIS     GARNIEK.  551 

political  economy,  who  have  touched  the  subject  of  prices,  have 
used  to  determine  the  value  of  the  precious  metals,  and  to 
account  for  their  fluctuations.  The  quantity  is,  of  course,  one 
of  these  elements,  and  is  allowed  more  or  less  influence  in  these 
various  theories ;  but  few  attribute  to  it  an  exclusive,  or  even 
prevalent  control. 

The  Marquis  Gamier,1  a  disciple  of  Adam  Smith,  argues  that 
no  addition  to  the  quantity  of  money  can  make  any  difference 
in  its  value,  if  it  required  the  same  proportion  of  labor  to  pro 
duce  it :  that  if  new  mines  be  found,  which  yield  a  greatly  in 
creased  quantity  of  the  precious  metals,  even  with  a  less  propor 
tion  of  labor,  the  value  will  not  be  reduced,  unless  the  increased 
quantity  satisfies  the  demands  of  commerce,  so  as  to  save  the 
necessity  of  working  the  old  mines,  the  value  being  fixed  by  the 
labor  required  to  produce  the  metals  at  the  poorest  mines :  that 
there  cannot,  in  regard  to  the  precious  metals,  be  either  scarcity 
or  abundance,  which  are  predicable  only  of  commodities  subject  to 
be  varied  in  their  supply  by  causes  beyond  the  control  of  man, 
such  as  the  uncertainty  of  the  seasons,  or  perishable  goods,  such 
as  must  be  lost  or  sold  for  what  they  will  bring :  that,  besides 
these,  the  only  exceptions  to  the  rule,  that  the  quantity  of  an 
object  of  exchange  has  no  influence  upon  its  price,  are  the  monu 
ments  of  antiquity,  or  curiosities  of  natural  history,  sought  by 
rich  amateurs,  and  of  which  the  rarity  constitutes  nearly  all  the 
price.  A  revolution  in  the  value  of  gold  and  silver  cannot, 
then,"  he  concludes,  "  occur  but  in  one  way  —  by  the  discovery 
of  new  mines  sufficiently  fruitful  to  satisfy  the  whole  demand, 
and  to  furnish  to  the  consumption  all  it  can  absorb,  upon  terms 
more  advantageous  than  before ;  that  is,  for  less  proportional 
labor  than  had,  till  then,  been  required  in  all  the  known  mines." 

As  the  Marquis  Gamier  occupies  a  high  position  among 
political  economists,  we  offer  here  his  views  upon  the  influx  of 
the  precious  metals  consequent  upon  the  discovery  of  the  Ame 
rican  mines : — 

"  The  gold  and  silver  of  America,  obtained  with  an  amount 

1  Ilistoire  de  Monnaie,  vol.  i.  chap.  iv.  p.  47. 


552  SUPPLY    OF    THE    PRECIOUS     METALS. 

of  labor  five  or  six  times  less  than  that  hitherto  required  to  pro 
duce  them,  and  collected  in  such  quantities  as  to  satisfy  the 
demand  of  all  consumers,  have  cheapened  the  old  gold  and  sil 
ver  of  Europe,  and  other  parts  of  the  world,  and  brought  them 
to  the  level  of  the  new  product.  .  .  V  *: 

"  This  gold  and  silver,  obtained  so  cheaply  from  countries  till 
then  unknown,  have  attracted,  by  their  low  price,  millions  of 
consumers,  who,  but  for  this  circumstance,  had  never  thought  of 
possessing  them.  The  sphere  of  their  consumption  is  prodi 
giously  increased,  and  to  fill  it  a  corresponding  quantity  of  gold 
and  silver  is  required.  After  this  revolution,  no  further  super 
abundance  has  resulted  in  their  production ;  they  have  taken,  in 
the  scale  of  values,  the  new  place  assigned  them  by  the  nature 
of  the  mines  of  which  they  are  the  product.  This  change  took 
place  in  the  first  century  after  the  discovery  of  these  mines; 
The  gold  and  silver  of  Mexico  and  Peru  had  not  been  sold  more 
than  fifty  years  in  the  markets  of  Europe  and  Asia,  before  this 
revolution  in  their  value  had  been  entirely  accomplished.  Since 
that  epoch  two  centuries  and  a  half  have  elapsed,  during  which 
time  there  have  been  imported  into  the  old  world  more  than 
$5,613,000,000  (trente  milliards  de  francs) ;  this  vast  importa 
tion  has  had,  upon  the  price  of  the  precious  metals,  no  in 
fluence. 

"  In  the  sixteenth  century,  a  half-mark  of  silver  exchanged, 
in  an  average  year,  for  a  setier  of  wheat,  Paris  measure.  At 
the  present  time  (1819),  the  same  setier,  at  the  mean  price  of 
twenty  years,  will  not  bring  certainly  a  greater  quantity  of 
silver.  The  prices  of  grain,  as  preserved  in  this  country  and  in 
England,  show  in  the  most  authentic  manner  that,  for  two  hun 
dred  and  fifty  years,  two  gros  of  fine  gold,  or  thirty  gros  of  fine 
silver,  have  been  the  average  price  of  a  measure  of  grain,  equal 
to  from  two  hundred  and  forty  to  two  hundred  and  fifty  livres, 
or  pounds.  Thus,  however  great,  during  that  time,  may  have 
been  the  product  of  these  mines,  the  whole  had  been  absorbed 
by  the  consumption,  in  which  it  is  proper  to  include  the  amount 
employed  in  commerce  with  China  and  the  Indies. 

"  The  quantity  produced  at  the  mines  is  proportioned  to  the 


ADAM   SMITH'S   OPINIONS.  553 

demands   of  this   consumption,  and  no    superabundance  could 
occur."1 

Adam  Smith  seems  to  have  been  exceedingly  puzzled  with 
this  subject,  and  his  perplexity  has  produced  a  harvest  of  con 
fusion.  His  difficulty  was  undoubtedly  that  of  reconciling  the 
facts,  in  the  history  of  money,  with  his  theory  making  labor  the 
standard  of  value.  "  The  quantity  of  labor,"  he'  says  (book 
i.  chapter  v.)  "  which  any  particular  quantity  of  gold  or  silver 
can  purchase,  or  the  quantity  of  other  goods  which  it  will  ex 
change  for,  depends  always  upon  the  fertility  or  barrenness  of 
the  mines  which  happen  to  be  known  about  the  time  when  such 
exchanges  are  made."  This  is  his  opinion  in  chief.  In  a  long 
digression  placed  at  a  good  remove  from  the  above,  at  the  end 
of  the  eleventh  chapter,  the  subject  of  the  fluctuations  in  the 
value  of  the  precious  metals  is  treated  at  large.  And  here, 
compelled  by  the  pressure  of  facts,  he  seems  to  allow  some  varia 
tion  from  his  theory,  and  explicitly  states  that  if  the  demand  for 
silver  "  should  increase,  while  at  the  same  time  the  supply  did 
not  increase  in  the  same  proportion,  the  value  would  gradually 
rise:"  that  if  the  contrary  happened,  silver  would  become 
cheaper ;  and  if  the  supply  and  demand  were  kept  equal,  its 
value  would  remain  the  same.2  Again:  —  "But  the  supply  had, 
it  seems,  so  far  exceeded  the  demand,  that  the  value  of  that 
metal  (silver)  sunk  considerably."3  "Labor,  it  must  always  be 
remembered,  and  not  any  particular  commodity,  or  set  of  com 
modities,  is  the  real  measure  of  the  value,  both  of  silver  and  of 
all  other  commodities."  "  Corn  accordingly,  it  has  already  been 
observed,  is,  in  all  the  different  stages  of  wealth  and  improve 
ment,  a  more  accurate  measure  of  value  than  any  other  commo 
dity,  or  set  of  commodities.  In  all  these  different  stages,  there 
fore,  we  can  judge  better  of  the  real  value  of  silver  by  comparing 
it  with  corn,  than  by  comparing  it  with  any  other  commodity, 
or  set  of  commodities."  These  two  passages  stand  on  the  same 
page.4  He  is  of  opinion,  that  "  about  1636,  the  effect  of  the 

1  Marquis  Gamier,  Histoire  de  Monnaie,  torn.  i.  p.  55. 

2  M'Culloch's  edit.  p.  81.  3  Ibid.  p.  88. 
8  M'Culloch's  edition  of  Smith,  pp.  86-88. 


554  GANIHL    ON    QUANTITY    OF    MONEY. 

discovery  of  the  mines  of  America,  in  reducing  the  value  of  sil 
ver,  was  completed  ;  it  rather  increased  than  diminished  in  value 
after  that  period."  This  digression  in  the  eleventh  chapter 
contains,  in  its  confused  form,  nearly  every  idea  so  clearly 
stated  in  the  above  extract  from  Gamier. 

Ganihl  quotes  another  passage  from  Adam  Smith,  which 
contains  a  different  opinion  from  any  of  those  given  above.1 
"  When  more  abundant  mines  are  discovered,  a  greater  quantity 
of  the  precious  metals  is  brought  to  market ;  and  the  quantity 
of  necessaries  and  conveniences  of  life  for  which  they  must  be 
exchanged  being  the  same  as  before,  equal  quantities  of  the 
metals  must  be  exchanged  for  smaller  quantities  of  commodities. 
So  far,  therefore,  as  the  increase  of  the  quantity  of  the  precious 
metals  in  any  country  arises  from  the  increased  abundance  of 
the  mines,  it  is  necessarily  connected  with  some  diminution  of 
their  value. "5  This  passage  is  regarded  by  Ganihl  as  support 
ing  a  doctrine  similar  to  that  of  Montesquieu ;  and  he  goes  into 
a  refutation  more  elaborate  than  that  of  Garnier.  lie  esti 
mates  the  whole  stock  of  the  precious  metals,  when  the  supply 
from  the  American  mines  commenced,  at  a  milliard  of  francs 
($187,000,000),  and  the  annual  supply  for  three  centuries  at 
120,000,000  of  francs  ($22,452,000),  which  has  increased  the 
mass  to  35  milliards.  This  sum,  after  making  every  possible 
allowance  for  plate,  for  export  to  the  Indies,  &c.,  would  still 
leave  20  milliards  ($3,742,000,000),  or  an  increase  of  twenty-fold 
as  the  then  (1820)  circulation  of  Europe.  "  If  the  doctrine  of 
A.  Smith  was  well  founded,"  he  proceeds,  "it  would  follow  that, 
as  gold  and  silver  have  been  augmented  to  twenty  times  the 
quantity  which  existed  at  the  discovery  of  the  American  mines, 
their  value  must  be  diminished  twenty  times ;  so  that  what  cost 
one  franc  then,  would  cost  twenty  francs  now.  In  fact,  how 
ever,  though  some  agricultural  products  have  increased  in  price 
three  or  four-fold,  nearly  every  thing  else,  and  especially  the 
products  of  industry,  have  rather  fallen  than  risen  in  price." 


1  Theorie  de  1'Economie  Politique,  torn.  ii.  p.  3G8. 

2  M'Culloch's  edition,  p.  80. 


INFERENCES     BY    G  A  N  I  H  L  .  555 

To  disprove  this  doctrine,  Ganihl  relies  further  upon  the  fact 
that  the  importation  of  silver  from  America  to  Europe  had  been 
in  the  proportion  of  from  22  to  29  to  1  of  gold  (by  Humboldt 
estimated  at  45  to  1) ;  "  whence  it  follows,  let  the  proportion  of 
the  amount  brought  from  the  mines  be  as  1  to  22,  or  29,  or  45, 
it  has  not  had  a  corresponding  influence  upon  the  value  in  cir 
culation,  for  that  stands  at  1  to  15J  ;  a  new  proof  that  the  value 
of  gold  and  silver,  considered  as  products  preferred,  depends 
not  upon  their  abundance  or  scarcity,  but  is  subject  to  different 
laws."1 

"For  more  than  a  century,"  proceeds  Ganihl,  "the  mines  of 
America  have  poured  into  Europe  the  annual  sum  of  120,000,000 
to  140,000,000  of  francs,  without  the  smallest  diminution  of 
their  value ;  and  what  is  more  to  the  point,  nearly  every  country 
in  Europe  has  devised  a  variety  of  substitutes,  more  or  less  in 
genious,  to  save  the  use  of  gold  and  silver  as  money,  which  is 
equivalent  to  an  increase  of  the  quantity.  It  is  impossible  to 
tell  the  extent  to  which  this  process  has  been  carried ;  but  it  is 
quite  certain  that  this  increase  of  money  and  its  substitutes  has 
not,  according  to  the  opinion  of  Adam  Smith,  experienced  any 
diminution  of  its  value.  It  is,  then,  evident  that  abundance 
has  no  influence  upon  their  value."' 

We  have  not  space  for  a  more  extended  examination  of  this 
subject.  The  main  facts  in  the  case  are  undeniable,  however 
some  may  qualify,  attempt  to  explain  them  away,  or  avoid  the 
legitimate  conclusions :  and  these  are,  that  the  depreciation  of 
the  precious  metals,  since  the  discovery  of  the  American  mines, 
has  by  no  means  corresponded  with  the  increase  of  quantity, 
and,  by  consequence,  that  the  general  rise  in  prices  of  other 
commodities  does  not  correspond  with  this  increase.  Our  object 
is  not  to  ascertain  the  exact  increase  in  the  amount  of  the  pre 
cious  metals,  nor  the  precise  influence  which  this  increase  had 
upon  the  prices  of  commodities  in  general,  but  merely  to  exhibit 

1  Tom.  ii.  p.  371. 

2  Ibid.  torn.  ii.  p.  372.     Ganihl  proceeds  with  his  argument  at  great 
length,  and  adduces  many  other  considerations  and  facts  in  support  of  hia 
position. 


556  HUMBOLBT  —  PRECIOUS    METALS. 

the  fallacy  of  conclusions  about  prices  drawn  from  the  quantity 
of  money.  There  can  be  no  doubt  that  the  increase  of  the  pre 
cious  metals  has  a  tendency  to  depreciate  their  value  ;  but  the 
history  of  two  hundred  and  fifty  years  of  a  constant  increase 
shows  that  this  tendency  has  not,  during  that  time,  entirely  pre 
vailed  over  other  influences  of  a  contrary  tendency.  The  motive 
of  self-interest  leads  men,  by  all  the  means  which  skill  and  in 
genuity  can  devise,  to  resist  the  tendency  of  their  possessions  to 
depreciate  ;  and  this  motive  exerts  its  most  powerful  influence  in 
regard  to  money.  Hence  new  uses  will  be  found  for  it  when 
it  is  abundant,  new  avenues  of  commerce  will  be  opened,  new 
branches  of  industry  will  be  essayed,  until  increased  production 
finds  employment  for  the  increase  of  money.  If  money  be  in 
creased,  industry  and  trade  are  increased ;  and  thus  the  ten 
dency  to  depreciation  is  met,  and  strongly  counteracted. 

If  the  law  which  is  supposed,  by  many,  to  govern  the  value 
of  the  precious  metals,  was  not,  as  we  have  stated  our  belief, 
subject  to  opposing  and  prevailing  tendencies,  gold  should  have 
increased  its  value,  as  compared  with  silver,  in  the  proportion  of 
this  increase  in  the  quantity  of  silver ;  that  is,  fifty  times. 

Humboldt,  who  has,  with  the  best  lights,  bestowed  the  fullest 
attention  upon  this  subject,  estimates  the  gold  derived  from  the 
American  mines,  from  their  discovery  down  to  the  year  1803,  at 
9,915,000  Castilian  marks ;  and  that  of  silver  obtained,  in  the 
same  period,  at  512,700,000,  or  more  than  51  times  as  much 
silver  as  gold.1 

The  actual  annual  product  of  the  two  metals,  at  the  com 
mencement  of  the  nineteenth  century,  is  stated  by  the  same 
as  follows :  — 

Marks. 

Silver 3,860,840 2 

Gold 75,217 

This  exhibits  the  same  disparity  in  the  production,  at  that 
period,  of  50  to  1  in  favor  of  silver.  The  disproportion  is  not 
so  great,  when  he  includes  in  his  estimate  all  the  known  mines 

1  Ilumboldt:  Essai  de  Nouvelle  Espagne,  vol.  ii.  p.  645;  an  estimate  at 
page  653  makes  it  40  to  1.     Bullion  Report,  1810,  Appendix  No.  27. 

2  Ibid.  p.  033. 


INCREASE  OF  PRECIOUS  METALS.      557 

of  the  world,  being  then  as  45  to  I.1  The  change,  however, 
which  took  place  between  the  relative  value  of  gold  and  silver, 
under  the  operation  of  this  increased  disproportion  in  the  respec 
tive  quantities,  was  only  from  10  to  1,  as  it  existed  before  the 
discovery  of  the  American  mines,  to  about  16  to  1,  as  it  exists 
now.  The  whole  addition  to  the  stock  of  the  precious  metals  in 
Europe  made  between  1492  and  1803,  is  estimated  by  Hum- 
boldt  at  §5,706,700,000,  or  more  than  thirty  times  the  quantity 
existing  at  the  date  first  mentioned,  as  stated  by  Jacob.2  This 
immense  sum  was  reduced,  of  course,  by  accident,  by  abrasion, 
by  manufacturing,  by  hoarding,  by  exportation  to  the  East 
Indies,  and  in  other  ways,  so  that  the  amount  was  greatly 
abridged.  If  this  reduction,  which  is  variously  estimated,  be 
taken  at  one-half,  it  left  the  stock,  at  the  beginning  of  the  pre 
sent  century,  about  fifteen  times  greater  in  Europe  than  that 
which  existed  at  the  beginning  of  the  16th  century.  Jacob, 
after  much  research,  estimates  the  general  rise  in  prices  at  470 
per  cent.3  Others  have  carried  them  higher ;  but  a  slight  ex 
amination  of  the  proper  authorities  shows  that  it  is  only  in 
England,  France,  and  a  few  others  of  the  more  prosperous  com 
mercial  and  manufacturing  countries  of  Europe,  that  even  such 
a  rise  as  this  has  taken  place.  In  most  countries  of  Italy,  the 
enhancement  of  prices  is  not  considerable ;  and  perhaps,  on  the 
average,  no  advance  has  taken  place  there.  The  whole  depre 
ciation  of  the  precious  metals  produced  by  this  increased  quan 
tity  does  not,  measured  by  the  rise  of  prices,  exceed  from  400  to 
500  per  cent.,  whilst  their  volume  has  swelled  to  1500  per  cent. 
Among  very  many  authorities  we  have  consulted  upon  this 
subject,  we  prefer  that  of  Arthur  Young,  so  long  and  favorably 
known  as  a  statistical  writer,  and  as  editor  of  the  " Annals  of 

1  Humboldt :  Essai  de  Nouvelle  Espagne,  vol.  ii.  pp.  634,  644. 

2  Precious  Metals,  vol.  ii.  chap,  xviii.  p.  63. 

3  Ibid.  vol.  ii.  chap.  xix.  p.  84.     Bishop  Fleetwood,  writing  at  the  begin 
ning  of  the  18th  century,  estimates  prices  to  have  risen  600  per  cent. ;  but 
shows  that  the  pound  sterling  of  the  15th  century  contained  as  much  silver 
as  two  pounds  of  his  day,  which  reduces  the  actual  advance  of  prices  to 
300  per  cent. —  Chronicon  Preciosum,  p.  135. 


558  ARTHUR    YOUNG    ON     PRICES. 

Agriculture."  His  pursuits  and  inclinations,  his  high  character, 
and  his  habits  of  accuracy,  fitted  him  for  such  an  investigation. 
He  engaged  in  it  deliberately,  and  pursued  it  with  every  advan 
tage,  and  with  all  diligence ;  and,  so  far  as  we  know,  his  con 
clusions  are  unimpeached  and  unimpeacheable.  He  has,  proba 
bly,  reached  an  approximation,  where  certainty  was  unattainable, 
as  close  as  can  ever  be  accomplished. 

The  following  table  contains  a  summary  of  the  results  wrought 
out  by  the  elaborate  investigations  of  Mr.  Young.  For  the  sake 
of  clearness,  he  took  the  prices  of  the  year  1810  as  a  unit  or 
standard,  and  assuming  them  as  represented  by  the  number  20 ; 
the  prices  of  previous  periods  covered  by  the  table  are  repre 
sented  by  numbers  showing  the  proportions  of  those  prices  to 
the  number  20. l 

1  Before  inserting  this  table,  we  place  Mr.  Young's  own  account  of  its 
origin,  and  the  labor  bestowed  upon  the  subject.  Arthur  Young's  name  is 
familiar  to  those  who  are  acquainted  with  the  letters  of  General  Washing 
ton,  with  whom  he  corresponded  for  a  long  period,  chiefly  upon  agricul 
tural  topics. 

"On  going  into  the  country,  June,  1811,  I  entered  particularly  on  the 
subject,  and  examined  a  multitude  of  authorities,  from  which  I  extracted  a 
great  variety  of  prices,  carefully  referring  to  every  authority,  quoting  the 
volume  and  page,  and  combining  them  with  all  to  be  found  in  the  books 
cited  by  Sir  George  Shuckburgh,  as  well  as  with  the  detail,  more  numerous 
than  had  before  been  published,  given  by  Sir  Frederick  Eden,  in  his  '  State 
of  the  Poor/  a  work  not  referred  to  by  Sir  George:  these  prices  I  reduced, 
with  much  labor,  to  the  standard  of  our  present  money.  The  investigation 
occupied  myself,  an  amanuensis,  and  an  accountant,  with  other  occasional 
assistance,  much  the  greater  part  of  ten  months,  and  at  no  inconsiderable 
expense.  It  was  also  necessary  to  form  tables  of  population,  taxes,  with  the 
imports  and  exports,  and  the  bank  circulation  of  the  kingdom,  for  a  period 
of  above  one  hundred  years.  All  these  documents  were  regularly  arranged 
in  a  manuscript  on  large  paper,  extending  to  above  five  hundred  pages ; 
and  in  order  to  gain,  for  the  years  1810  and  1811,  the  prices  of  every  sort 
of  provision,  labor,  wool,  timber,  coal,  and  the  year's  purchase  at  which 
land  sold,  I  despatched  a  circular  letter  to  many  respectable  correspondents 
throughout  England  and  Wales:  the  answers  received  were  so  numerous 
and  satisfactory,  as  to  leave  little  to  wish  for.  The  present  publication  will 
give  a  general  idea  of  all  the  results ;  and  I  do  not  venture  it  to  the  public 
eye,  without  premising  that  the  authorities  collected  are  preserved  for  the 
inspection  of  those  who  may  have  curiosity  enough  to  consult  them  :  if 


TABLES  DEDUCED  FROM  ARTHUR  YOUNG.   559 


Wheat 

Barley  and  Oats 

Wheat,  Barley  and  Oats,  united- 
Provisions 

Wheat  and  Provisions 

Corn  and  Provisions,  united 

Victualling — Office  Beef  and  Pork.. 

Population 

Taxes 

Trade 

Taxes  aud  Trade,  united 

Labor 

Labor.  Corn  and  Provisions,  united. 

Bank  Circulation 

Artisans 

Wool-combing 

Horses. 

Coals 

Iron 

Manufactures  at  Greenw'h  hospital. 
Post-office 


15      17 


From  the  foregoing  table  we  deduce  the  one  following,  by 
taking  all  the  averages  for  each  period,  and  reducing  them  into 
one  which  stands  as  the  proportion  of  the  prices  of  that  period 
to  20:  — 


PERIODS. 

ropnrtion  of  the 
iv  era  Re  prices  to 
he  number  20. 

111 

iJi 

±—  t 
.>  §  bt 

ISr 

112 

-i.  =. 

Wi 

!~iu 

Isl 
^  K  s 

-  5^ 
|.Hg 

|| 

if  s 
'•^  c— 

^   a   >* 

~~  "~  •-    .* 

^  fl 

|!!l 

REMARKS. 

13th  century  

5]- 

The   stock  of 

14th       "      ...     . 

6T5 

?7 

the    precious 

lath       "      

T2 

4i 

36 

$163  000  000 

metals  em 

16th       "      . 

T5 
51 

94 

624  000  000 

380 

ployed    as 

17th       "      

"6 

9  s 

SO 

80 

1  425  600  006 

875 

stated,   upon 

18th       " 

°2^ 

108 

11 

108 

1  824  000  000 

] 

the   estimate 

J  „;  f  1701  to  1766.. 
||  j  1767  to  1789.. 
§  g,  1  1767  to  1800.. 

^ 

8.78 

10  \i 
1U 

25 
9 

20 

108 
122 

1120 

of  Jacob,  in 
his  work   on 
the  Precious 
Metals,  v.  ii. 

2-  1  1790  to  1803.. 
1804  to  1810  

^ 
15 

20 

27 
33 



190 

280 

1  824  000  000 

1120 

pages  63,  70, 
131,167,214, 
322. 

they  do  not  prove  the  capacity  of  the  collector,  they  will,  at  least,  show 
such  an  extent  of  research,  and  industry  of  application,  as  shall  exempt 
him  from  any  idea  of  inattention  to  the  means  of  rendering  this  work  gene 
rally  useful."  —  Inquiry  into  the  Progressive  Value  of  Monet/  in  England,  ly 
Arthur  Young  ;  Introduction. 


560 


PRICES  —  RATE    OF    DEPRECIATION. 


To  enable  those  who  are  desirous  of  making  the  comparison 
between  the  increase  of  gold  and  silver  and  the  increase  of 
prices,  we  annex  a  table  from  Humboldt  and  others :  — 


Average  annu.il  importation 

of  gold  and  silver. 

1492  to  1500  

$250,000 

1500  to  1545                      

3,000,000 

1545  to  1600  

11,000,000 

1600  to  1700          

16,000,000 

1700  to  1760  

22,500,000 

1750  to  1803'     

35,300,000 

1803  to  1S102  

39,900,000 

1810  to  1823          

17,000,000 

1823  to  1847  

34,000,000 

1847  to  1851           

64,000,000 

1852  

235,000,000 

It  appears,  from  these  careful  investigations  of  Arthur  Young, 
that  the  whole  average  advance  of  prices  did  not  exceed  280  per 
cent,  from  the  15th  to  the  19th  century,  or  to  the  year  1810 ; 
that  is,  less  than  in  the  proportion  of  1  to  3.  In  that  same  pe 
riod,  the  increase  of  the  precious  metals  employed  as  money  was 
as  1  to  11.  Humboldt  estimates  the  receipts  from  American 
mines,  up  to  the  year  1500,  at  not  over  $250,000  yearly,  but  as 
having  grown  to  nearly  $40,000,000  in  1810 ;  that  is,  as  1  to  160. 
In  the  period  from  the  15th  to  the  16th  century,  general  prices 
were  enhanced  24  per  cent.,  while  the  whole  stock  of  money  had 
increased  380  per  cent.  In  the  17th  century,  prices  advanced 
80  per  cent.,  whilst  the  stock  of  coin  increased  875  per  cent. 
In  the  next,  or  18th  century,  prices  rose  to  190  per  cent.,  whilst 
the  stock  of  money  was  increased  1120  per  cent.  So  little  do 
general  prices  appear,  by  this  statement,  to  obey  any  influence 
arising  from  the  increased  stock  of  money,  that  it  seems  doubt 
ful  if  we  should  allow  any  portion  of  the  actual  advance  to  go 
to  that  account.  There  were  other  influences  operating  on 
prices,  for  which  allowance  must  be  made  ;  and,  in  fact,  we  shall 
not  go  far  wrong,  if  we  attribute  the  whole  rise  in  prices  to  that 
increased  activity  in  all  kinds  of  business  which  increases  de- 


1  Humboldt,  Nouvelle  Espagne,  fol.  edit.  1811,  vol.  ii.  p.  Gil. 

2  The  remaining  figures  are  from  Tegoborski  des  Gites  Auriferes,  p.  37. 


PRICES    IN    SPAIN.    1600    TO    1800. 


561 


mand.  The  increased  stock  of  money  proved,  no  doubt,  a  stimulus 
to  industry  and  trade,  and  thus  operated  on  prices.  It  is,  at 
least,  very  clear,  from  this  showing,  that  there  is  no  necessary 
nor  immediate  connection  between  prices  and  the  quantity  of 
money.  So  far  as  the  quantity  of  money  is  an  element  of  prices, 
it  seems  to  be  one  of  the  least  influential ;  and  it  cannot  be  one 
of  these  causes  to  which  great  and  sudden  fluctuations  of  prices 
are  ever  due.1 

If  the  influx  of  the  precious  metals  from  the  American  mines 
were  calculated  to  have  an  immediate  or  strong  effect  upon 
prices,  we  might  safely  look  to  Spain  for  the  most  signal  exem 
plification,  as  more  than  two-thirds  of  their  products  were 
shipped  to  that  country,  and  thence  distributed  to  the  rest  of 
the  world.  But  we  find  no  rise  in  prices  there  corresponding  to 
the  immense  influx  of  the  precious  metals  into  the  country. 

In  the  following  table,  we  furnish  the  average  prices  of  wheat 
and  barley  in  Spain  for  the  five  years  ending  1680,  and  for 
every  period  of  ten  years  after,  to  the  year  1800,  together  with 
the  coinage  of  the  Mexican  mint.  One  hundred  fanegas  are 
equal  to  152  bushels.  The  real  is  equal  to  ^  of  a  dollar. 


Periods  ending  at  the  date  annexed. 

Average    price    of 
wheat  per  fanega, 
in  reals. 

Average    price    of 
barley  per  fanega, 
in  reals. 

Coinage  of  the  mint  at  Mexico, 
in  dollars. 

1680,      5  years  

37.6 

14'  0 

1690,    10       "    

16.2 

9.3 

1700,              " 

17  0 

8  4 

$43  871  000 

1710,             "   

15.0 

8  9 

51  731  000 

1720,              "   . 

18  0 

8  7 

65  747  000 

1730               " 

12  7 

6  2 

84  153  000 

1740,              "   

17  4 

8  7 

90  529  000 

1750               " 

17  4 

8  2 

111  855  000 

1760,              "   

18  2 

10  6 

125  750  000 

1770,              «   

1780               " 

27.5 
26  5 

12.5 
14  2 

112,828,000 
165  181  000 

1790               "   

28  6 

16  7 

193  504  000 

1800               " 

42  2 

21  1 

231  080  000 

Total  

$1,276  229  000 

1  Report  on  the  High  Price  of  Bullion,  made  to  the  House  of  Commons 
in  1810,  Appendix,  p.  182 ;  Beawes  on  Spain,  p.  272 ;  Humboldt,  Nouvelle 
Espagne,  fol.  edit.  p.  580. 

36 


562  CHRONICOX    PKECIOSUM. 

During  the  period  embraced  in  this  table,  the  mines  of  Spanish 
America  were  yielding  an  annual  product  of  $33,000,000,  a 
very  large  proportion  of  which  were  poured  into  Spain.  Yet,  in 
the  face  of  this  increase  of  money  beyond  any  parallel  in  the 
world,  the  prices  of  wheat  and  barley,  although  extremely  fluc 
tuating,  remained  for  eighty  years  under  half  the  rates  of  1680. 
The  rise  which  took  place  towards  the  end  of  the  18th  century, 
may  be  attributed,  in  part,  to  the  neglect  of  agriculture  conse 
quent  upon  the  emigration  to  the  new  world,  and  the  immense 
wealth  flowing  from  there.  But  the  subject  of  prices  in  Spain 
present  too  wide  a  field  for  survey  now ;  the  only  point  pre 
sented  is  the  influence  on  prices  of  this  great  influx  of  the  pre 
cious  metals. 

We  find  the  following  passage  in  one  of  the  most  reliable 
works  we  have  on  Spain.  The  author,  who  investigated  the  sub 
ject  of  prices  with  special  reference  to  the  wages  of  labor  and 
the  price  of  grain,  says  :  — 

"  We  see  daily  that  the  price  of  grain  is  not  ruled  by  the 
plenty  or  scarcity  of  gold  or  silver,  but  by  its  own  superabund 
ance  or  defect,  as  where  we  raise  more  than  we  can  vent,  or 
where  we  could  vent  more  than  we  raise  :  so  in  laborers,  where 
they  are  scarce,  they  command  their  wages ;  where  plentiful,  the 
wages  command  them.  Hence  it  is  evident  that  gold  or  silver 
is  much  balanced  by  the  plenty  or  scarcity  of  other  things,  as 
those  by  gold  and  silver ;  and  upon  that  balance  depends  the 
difference  of  prices."1 

Although  the  intelligent  and  accurate  author  has  the  prices 
of  England  also  in  view,  as  he  examined  the  subject  partly  in 
the  light  of  Bishop  Fleetwood's  "  Chronicon  Preciosum,"  yet  he 
expressly  applies  his  conclusions  to  Spain,  the  country  of  which 
he  was  writing,  and  in  which  he  had  been  thirty  years  a  resi 
dent.  He  regarded  the  question  of  the  influence  of  money  upon 
prices  as  of  the  "  last  importance,"  and  therefore  gave  the  sub 
ject  deliberate  and  earnest  attention. 

The  following  is  a  table  of  the  price  of  wheat  in  France,  taken 


1  The  Civil,  Commmercial,  Political  and  Literary  History  of  Spain  and 
Portugal,  by  \V~yndhara  Beawes,  English  Consul  at  Seville,  folio,  1793, 
page  272. 


PRICES    IN    FRANCE,    1680    TO    1797 


563 


at  the  average  of  various  periods,  from  1675  to  1800.  The 
setier  is  equal  to  2-1%3070  bushels.  The  price  is  carried  out  in 
money  of  the  United  States.1 


Number  of  years  of 
which    average    is 
taken. 

Last  year 
of    the 
average. 

Price  of  a 

setier   of 
wheat. 

REMARKS. 

5  years.... 

1680 

$6.10 

^he  alterations  of  the  French  coins  have  been  so 

11      " 

1691 

4.27 

frequent,  that  the  periods  have  been  taken  between 

7     " 

1698 

6.84 

the  dates  of  these  alterations,  as  they  show  suffi 

9      « 

, 

1711 

5.38 

ciently  the  current  of  prices.     Where  the  altera 

3      " 

1714 

6.29 

tions  have  occurred  several  times  in  a  year,  and 

4      " 

_ 

1718 

3.49 

in  two  or  three  years,  these  are  omitted,  and  so  are 

3      " 

1723 

2.37 

years  of  famine.    In  1740,  the  setier  was  at  nearly 

4      " 

f 

1730 

2.89 

$23  ;  in  1841,  it  fell  below  $8  ;  and  the  average 

7      " 

1733 

3.17 

of  the  fallowing  nine  years  was  $3.19. 

5      « 

1739 

3.33 

Montveran  estimates  the  quantity  of  money  circu 

9      " 

1750 

3.19 

lating  in  France,  at  various  periods,  to  be  as  fol 

10      " 

1760 

3.97 

lows  :  — 

10      « 

1770 

4.32 

1600...  $109,600,000     175.°,...  $259,432,000 

10      « 

1780 

5.20 

1684...     208.385,000     1797...     416,361,000 

14     " 

1797 

5.77 

1716...     240,601,000     1830...     523,366,000 

It  is  equally  clear,  from  the  above  statement,  that  during  a 
period  of  more  than  a  century,  when  the  most  extraordinary 
additions  were  making  to  the  money  of  the  world,  no  permanent 
advance  in  the  price  of  wheat  took  place  in  France.  According 
to  the  preceding  tables,  the  productions  of  the  mines,  in  the  18th 
century,  more  than  doubled  the  stock  previously  existing.  Yet 
it  cannot  be  denied  that  the  depreciation  of  the  precious  metals 
ceased  at  the  end  of  the  17th  century ;  or,  in  other  words,  no 
general  and  permanent  rise  in  prices  took  place,  corresponding 
with  the  increase  of  money.2 

1  This  table  is  deduced  from  the  very  minute  and  extended  one  of  Mont 
veran,  published  in  the  "  Bulletin  de  la  Societe  Franchise  de  Statistique 
Universelle,"  Nos.  iii.  et  iv.,  1830,  p.  47. 

2  The  following  works  may  be  consulted  on  this  subject :  —  Wealth  of 
Nations,  book  i.  chap.  xi.  M'Culloch's  edit.  p.  Ill ;  Chronicon  Preciosum, 
by  Bishop  Fleetwood ;  Jacob  on  the  Precious  Metals  ;  Inquiry  into    the 
Prices  of  Wheat,  Malt,  &c.,  from  the  year  1000  to  1765,  folio,  London, 
1768 .  Ruding's  Annals  of  the  Coinage,  vol.  i.  ;  Seaman's  Progress  of  Na 
tions,  New  York,  1848,  chap.  xvii.  xviii.,  a  work  we  commend  to  every 
young  American  desirous  of  becoming  a  statesman  ;  Dupre  St.  Maur  Essai 
sur  Monnaies,  4to  ;  Chevalier;  Economic  Politique,  vol.  iii.  sec.  v.  chap,  xi.; 
Recherches  sur  d'Or  et  sur  PArgent,  par  Leon  Faucher,  Paris,  1843  ;  Gites 
Auriferes,  par  Tegoboiski,  Paris,  1853  ;  De  1'Or  et  de  1' Argent,  par  Narcea 
Tarassenko-Otreschkoff,  Paris,  1856,  8vo. 


564      INFLUENCE  OF  BANK  CURRENCY. 


§  3.  Effects  of  bank  currency  upon  prices  —  Increase  of  wealth  in  Great 
Britain  in  tlie  eighteenth  century  —  Advance  in  prices  often  increases  cur 
rency —  Power  of  purchasing  does  not  depend  upon  money,  but  upon  per 
sonal  confidence  —  Seasons  of  high  confidence  lead  to  speculation  —  Lord 
Overstone —  Tooke's  History  of  Ibices  —  His  examination  before  the  secret 
committee  0/1832  —  Evidence  on  prices  before  Parliamentary  committees 
o/'1832  and  1840  —  Influx  of  gold  from  California  and  Australia  —  Com 
parison  of  all  currencies  in  the  United  States  in  1848  and  1856  —  Prices 
the  scale  by  which  products  of  labor  are  exchanged  —  Justice  to  labor  is 
determined  by  what  men  can  purchase,  and  not  by  the  price  tliey  pay. 

IF  the  precious  metals  employed  as  money  exercised  so  little 
influence  on  prices  by  their  increase  or  decrease,  we  may  safely 
infer  that  bank  currency  has  no  greater  power  in  that  respect. 
The  economy  of  bank  currency,  as  a  medium  of  payment,  being 
very  great,  it  is  important  to  discover  whether  there  are  coun 
tervailing  disadvantages.  It  is  chiefly  in  reference  to  this  ques 
tion  that  we  have  dwelt  so  minutely  upon  the  influence  of  metal 
lic  money.  The  actual  advantages  or  disadvantages  of  an 
increase  of  the  precious  metals  is  a  different  question  from  their 
influence  upon  prices ;  the  latter  may  be  enhanced  by  the 
depreciation  of  the  metals,  without  other  injury  than  increasing 
the  weight  and  bulk  of  an  equal  value  in  money.  But  if  the 
substitutes  for  money  enhance  prices  in  proportion  to  the  extent 
they  are  employed,  it  becomes  a  question  at  once  of  grave  im 
port,  whether  such  enhancement  is  not  injurious,  and  whether 
the  injury  finds  any  adequate  compensation  in  the  economy  of 
employing  substitutes.  This  question  can  be  best  resolved  by  the 
operation  of  the  paper  currencies  of  Great  Britain  and  the 
United  States.  We  have  anticipated  this  investigation  by  com 
paring  the  increase  of  the  precious  metals  and  the  progress  of 
prices  in  the  18th  century.  The  use  of  paper  currency  in  England 
commenced  its  great  expansion  with  the  beginning  of  that  cen 
tury  ;  and  the  increase  of  prices,  which  we  have  examined  only 
in  connection  with  the  increase  of  gold  and  silver,  is  in  fact  due, 
so  far  as  that  cause  operated,  to  the  joint  influence  of  metallic 
money  and  paper  currency,  or  the  use  of  credit.  We  have  seen, 
in  the  table  deduced  from  Arthur  Young's  "  Progressive  Value 


PROGRESS  OF  WEALTH  IN  ENGLAND.     565 

of  Money,"  that  the  average  prices  of  the  16th  century  were 
only  an  advance  of  24  per  cent,  over  those  of  the  15th  century, 
whilst  an  addition  of  380  per  cent,  had  been  made  to  the  stock 
of  the  precious  metals ;  that  the  average  prices  of  the  17th  cen 
tury  were  advanced  80  per  cent,  over  those  of  the  16th  century, 
and  the  addition  to  the  stock  of  the  precious  metals  875  per 
cent. ;  that  the  average  prices  of  the  18th  century  over  those 
of  the  17th  were  an  advance  of  11  per  cent.,  and  the  addition 
to  the  stock  of  the  precious  metals  1120  per  cent. ;  and  to  make 
the  case  more  striking,  that  the  prices  of  the  18th  century  over 
those  of  the  15th  were  an  advance  of  108  per  cent.,  whilst  the 
addition  to  the  stock  of  the  precious  metals,  in  the  three  centu 
ries,  had  been  1120  per  cent.  It  is  worthy  of  remark,  that  the 
average  prices  of  the  17th  century  over  those  of  the  15th,  cover 
ing  a  period  before  the  use  of  paper  currency,  exhibit  an  advance 
of  111  per  cent. ;  whilst  the  average  prices  of  the  18th  century, 
in  which  there  was  a  great  use  of  paper  currency,  besides  the 
immense  increase  of  the  precious  metals  just  noticed,  present  an 
advance  over  those  of  the  17th  of  only  11  per  cent. 

The  increase  of  wealth  in  Great  Britain  in  the  18th  century, 
by  means  of  industry  and  commerce,  had  no  previous  parallel. 
This  is  familiar  to  all  conversant  with  her  history.  A  few 
facts  will  place  it  in  a  striking  light.  The  united  value  of  the 
imports  and  exports,  for  the  years  1G98  to  1701,  is  £12,000,000 
sterling;  in  1802,  the  united  value  had  reached  to  nearly 
£73,000,000  sterling,1  being  an  increase  of  over  600  per  cent. 
In  the  year  1700,  the  tonnage  of  vessels  clearing  outwards  was 
317,328 ;  in  1800,  it  amounted  to  2,130,322,  being  an  advance 
of  over  600  per  cent.2  The  public  revenue  of  England,  in  the 
year  1701,  from  all  sources,  amounted  to  £3,895,205;  in  the 
year  1800,  it  amounted  to  <£29,604,008,3  being  an  increase  of 
over  700  per  cent.  The  increase  of  manufactures  cannot  easily 
be  estimated,  but  its  magnitude  has  long  been  the  subject  of 

1  M'Culloch's  Dictionary  of  Commerce,  Art.  "  Imports,"  &c. 

2  George  Chalmers's  estimate. 

*  Pablo  Pebrer:  Taxation,  Ptevenue  and  Expenditures  of  Great  Britain, 
page  156. 


566  PAPER    CURRENCY    AND    PRICES. 

wonder.  This  increase  of  material  wealth  was  not  only  aided 
by  the  influx  of  the  precious  metals  then  flowing  into  the  com 
merce  of  the  world,  but  by  an  increased  use  of  substitutes  for 
money  to  an  extent  constituting  a  principal  feature  in  the  com 
merce  of  that  period.  During  the  ten  years  ending  1710,  the 
average  circulation  of  the  notes  of  the  Bank  of  England  was 
X758,000 ;  this  had  increased,  in  the  ten  years  ending  1800,  to 
£11,470,000,  or  1600  per  cent.  The  Bank  of  Scotland  is 
nearly  coeval  with  that  of  England ;  and  in  addition  to  it.  many 
other  banks  went  into  operation  in  Scotland  during  the  18th 
century,  all  of  which  contributed  their  portion  to  the  paper  cir 
culation.  Private  bankers  throughout  the  country  added  their 
paper  to  the  mass  of  the  paper  currency  —  a  mass  which  cannot 
be  estimated,  for  want  of  proper  data.  The  practice  of  circu 
lating  bills  of  exchange  and  promissory  notes  in  payments,  as  a 
substitute  for  money,  was  greatly  extended  in  this  p-eriod. 

During  the  whole  of  the  18th  century,  the  balance  of  trade, 
with  the  exception  of  the  year  1781,  was  in  favor  of  Great 
Britain  with  the  whole  world ;  it  must  be  clear,  therefore,  what 
ever  doubts  may  rest  upon  the  entire  accuracy  of  these  national 
balances,  that  Great  Britain  obtained  her  full  share  of  the  great 
accession  which  was  then  made  to  the  previous  stock  of  gold  and 
silver.  In  addition  to  this  was  employed  the  vast  accession  of 
substitutes  which  banking  and  its  various  facilities  produced. 
Yet,  with  all  this,  prices  advanced  only  11  per  cent. ;  and  to 
what  one,  or  to  how  many,  of  the  elements  of  prices,  and  in 
what  degree  to  each  one,  this  advance  is  to  be  attributed,  no 
human  knowledge  or  scrutiny  can  ever  disclose.  We  find  in 
these  facts,  surely,  very  little  proof  that  prices  are  controlled  by 
the  quantity  of  money  or  currency  in  circulation,  or  that  there 
is  any  regular  proportion  between  them. 

It  is  utterly  unsafe,  therefore,  to  infer  that  a  currency  is  in 
excess,  because  prices  have  risen ;  or  to  conclude,  if  a  currency 
is  in  excess,  that  prices  must  rise ;  or  if  they  have  risen,  that 
the  risa  is  in  consequence  of  that  excess,  or  that  there  can  or 
will  be  any  fixed  proportion  between  them.  It  will  be  found 
not  unfrequently,  on  close  inspection,  that  a  rise  of  prices  has 


PERSONAL     CREDIT  —  EFFECT     ON     PRICES.       567 

preceded  and  been  the  cause  of  an  increase  of  money;  but  as 
the  former  is  generally  first  known,  and  the  latter  slowly  ascer 
tained,  the  order  of  cause  and  effect  is  reversed  in  the  minds  of 
most  observers.  When  the  horizon  of  trade  and  politics  is  clear, 
when  no  pressure  is  felt,  and  no  dreaded  crisis  is  impending, 
when  a  few  years  of  punctuality  and  fair  dealing  have  blotted 
out  the  memory  of  frauds  and  losses,  confidence  between  man 
and  man  rises,  becomes  strong  and  unsuspecting,  grows  into 
credit,  and  credit  becomes  even  more  efficient  than  money. 
When  credit,  therefore,  furnishes  to  multitudes  the  power  of 
purchasing  at  will  with  their  own  paper,  the  abuse  of  this  power 
degenerates  into  speculation.  The  active  competition  which 
takes  place  in  purchasing,  between  those  who  are  thus  unre 
strained  in  their  power  of  acquiring  commodities,  produces  an 
immediate  advance  in  prices,  and  that  advance  produces  its  usual 
effect  of  stimulating  the  movements  of  the  speculators.  It  is 
deemed  safe  to  purchase  in  a  rising  market.  Prices  must  con 
tinue,  while  this  spirit  prevails,  to  advance,  and  the  profits  real 
ized  by  first  purchasers  will  tempt  others  to  embark  in  the  move 
ment,  which  grows  as  it  advances.  All  this  enhancement  of 
prices  takes  place  without  the  use  of  currency,  and  is  founded 
wholly  upon  personal  confidence.  It  is  true,  that  much  of  the 
individual  paper  issued  in  these  purchases  may  be  discounted, 
and  the  notes  of  the  banks  be  thrown  into  circulation  in  place 
of  them ;  and  this  may  have  a  slight  tendency  to  swell  prices. 
Prices,  however,  as  we  have  seen,  generally  begin  and  rise  in 
the  wholesale  transactions,  and  these  are  almost  altogether  upon 
credit.  The  effect  of  the  increased  circulation  is  rather,  in  the 
first  instance,  to  support  the  high  prices  than  to  create  them. 
The  holder  of  the  goods  is  able  more  easily  to  make  such  sales 
as  will  enable  him  to  acquit  the  liability  incurred  in  their  pur 
chase,  because  his  creditor,  by  having  his  note  discounted  at  a 
bank,  has  added  to  the  currency  the  amount  of  his  debt ;  and 
thus  he  has  only  to  exchange  his  goods  for  the  equivalent 
amount  of  bank-notes  which  his  purchase  has  added  to  the  cir 
culation. 

It  is  in  such  seasons,  and  owing  to  this  high  confidence,  that 


568  S.    JONES    LOYD    ON    PRICES. 

commercial  dealings  are  pushed  to  an  extent  which  results  in  an 
excessive  issue  of  bank-notes ;  and  surely  no  human  sagacity 
could  tell,  in  such  case,  what  proportion  of  the  advance  of  price? 
was  owing  to  the  spirit  of  speculation,  and  to  the  high  state  of 
individual  credit,  and  what  to  the  consequent  excessive  issue  of 
currency.  Any  attempt  thus  to  discriminate  must  be  abandoned 
as  useless  by  the  careful  inquirer.  Yet  what  positive  and  un 
hesitating  conclusions  have  been  drawn  from  data  as  uncertain  ! 
How  often,  in  such  cases,  have  we  been  assured  that  the  cur 
rency  has  been  depreciated  in  the  precise  ratio  of  such  an  in 
crease  of  prices  ! 

The  commercial  events  of  the  last  fifty  or  sixty  years  must, 
if  properly  applied,  be  decisive  of  the  relations  between  currency 
and  prices  ;  and  more  especially  has  the  experience  of  this  period 
been  distinct  in  Great  Britain  and  the  United  States.  In  regard 
to  the  former  we  are,  fortunately  for  the  patience  as  well  as  for 
the  information  of  the  reader,  not  without  ample  references.1 

Among  those  who  have  recently  written  on  the  subject  of  cur- 

1  If  it  be  thought  that  we  are  taking  unnecessary  pains  in  combating  the 
position  that  currency  regulates  prices,  let  it  be  kept  in  mind  that  this  false 
position  is  by  many  regarded  as  an  axiom  never  to  be  doubted  or  called  in 
question.  It  is  the  plausible  and  ready  solution  applied  by  multitudes  to 
many  difficulties  and  doubts  in  relation  to  the  theory  of  money  and  bank 
ing.  It  is  repeated  on  every  side  by  pamphleteers  and  newspaper  writers, 
and  though  often  refuted,  still  reappears.  As  late  as  1837,  S.  Jones  Loyd, 
now  Lord  Overstone,  in  a  pamphlet,  expressed  himself  thus :  —  "  If  the  cur 
rency  be  in  excess,  prices  of  all  articles  are  affected  in  a  corresponding  de 
gree."  This  opinion  of  Loyd  is  quoted  by  J.  B.  Smith,  President  of  the 
Manchester  Chamber  of  Commerce,  in  a  pamphlet  of  1840,  addressed  to  Mr. 
Loyd  ;  and  Mr.  Smith  thus  enforces  the  doctrine :  —  "  Supposing  the  Bank 
of  England  to  have  a  certain  amount  of  paper  in  circulation,  against  a  cer 
tain  quantity  of  commodities  of  all  kinds  in  the  market,  at  a  given  period ; 
then,  supposing  that  the  bank  increased  its  issues  by  a  million,  the  quantity 
of  commodities  remaining  the  same,  it  is  quite  evident  that  the  natural  ten 
dency  of  such  an  operation  would  be  to  raise  the  money  value  of  commodi 
ties.  Either  the  price  of  commodities  must  rise,  or  the  money  must  remain 
without  employment.  If  the  money  remained  for  a  time  without  employ 
ment,  the  necessary  effect  would  be  a  reduction  of  the  rate  of  interest,  and 
so  a  rise  in  the  price  of  commodities  would  be  produced."  —  J.  B.  Smith's 
Letter  to  S.  J.  Loyd,  page  10. 


TO  ORE'S  HISTORY   or  PRICES.  569 

rency,  in  Great  Britain,  few,  if  any,  have  attained  higher  con 
sideration  than  Samuel  Jones  Loyd  (Lord  Overstone),  a  London 
banker.  His  opinion  on  this  subject  is  deemed  none  the  less 
important,  that  he  has  changed  his  views  since  1837.  A  letter 
of  his,  published  in  1840,  contains  the  following  emphatic  pas 
sage  :  —  "  Fluctuations  in  the  amount  of  the  currency  are  sel 
dom,  if  ever,  the  original  and  exciting  cause  of  fluctuations  in 
prices,  and  in  the  state  of  trade.  The  buoyant  and  sanguine 
character  of  the  human  mind ;  miscalculations  as  to  the  relative 
extent  of  supply  and  demand ;  fluctuations  of  the  seasons ; 
changes  of  taste  and  fashion  ;  legislative  enactments  and  politi 
cal  events ;  excitement  or  depression  in  the  condition  of  other 
countries  connected  with  us  by  active  trading  intercourse ;  an 
endless  variety  of  casualties  acting  upon  those  sympathies  by 
which  masses  of  men  are  often  urged  into  a  state  of  excitement 
or  depression  —  these  all,  or  some  of  them,  are  generally  the 
originally  exciting  causes  of  great  variations  in  the  state  of 
trade."1 

To  Thomas  Tooke,  Esq.,  of  London,  author  of  "A  History 
of  Prices,  and  of  the  State  of  Circulation,  from  1793  to  1837," 2 
however,  is  the  world  indebted  for  the  most  thorough  and  search 
ing  examination  of  this  subject.  This  work  has  no  equal,  in  any 
department  of  political  economy,  for  indefatigable  research,  for 
patient  analysis,  for  the  extent  and  variety  of  facts  on  which  its 
conclusions  are  based,  for  fulness  of  illustration,  and  for  lucid 
arrangement.  It  furnishes  a  model  to  which  all  investigations  of 
this  kind  must  in  some  degree  be  conformed,  if  destined  to  com 
mand  eventually  the  public  approval.  What  it  fails  in  clearness 
of  expression,  is  fully  made  up  by  other  merits.  This  history 
has,  from  its  appearance,  received  high  commendation  ;3  and  we 

1  Letter  to  J.  B.  Smith,  page  10. 

2  2  vols.  8vo.  1833,  with  a  continuation  published  in  1840,  bringing  down 
the  history  to  the  end  of  1839 ;  a  fourth  volume  in  1848,  and  the  fifth  and 
sixth  volumes  in  1858. 

3  "A  work  equally  distinguished  for  the  soundness  and  comprehensive 
ness  of  its  general  views,  and  the  extent  and  accuracy  of  its  practical  infor 
mation."  —  Edinburgh  Review,  No.  86. 

"  Mr.  Tooke's  work  on  prices,  in  which  details  are  given,  accurate  as  to 


570     MR.    TOOKE    AND    THE    COMMITTEE    OF    SECRECY. 

are  not  aware  that  any  respectable  attempt  has  been  made  to 
refute  its  conclusions,  or  weaken  its  authority ;  although  its 
main  object  and  undeniable  result  has  been  to  contradict  many 
cherished  positions  of  leading  political  economists  and  theorists 
of  the  present  and  past  generation.  In  all  that  regards  prices, 
and  the  state  of  circulation,  in  the  period  to  which  it  refers,  we 
deem  this  history  as  finally  settling  most  of  the  questions  with 
which  it  grapples :  in  regard  to  more  general  questions,  in  rela 
tion  to  money  and  banking,  we  think  the  author  has  shown 
himself  unprepared  to  carry  his  analysis,  and  push  his  conclu 
sions,  to  the  extent  to  which  his  well-established  facts  would 
warrant.  We  cannot  but  think  that  if  his  patient  search  for 
truth,  his  strong  powers  of  discrimination,  and  his  long  expe 
rience  as  a  merchant,  had  been  brought  to  bear  specially  upon 
the  great  questions  involved  in  the  subjects  of  banking  and 
money,  that  equal  light  would  have  been  shed  upon  them  with 
that  thrown  upon  prices.  If  we  do  not  greatly  mistake,  he 
would  have  found  himself,  in  that  career,  carried  to  conclusions 
as  much  opposed  to  commonly-received  opinions  as  those  which 
he  established  in  his  "History  of  Prices."  l 

The  period  embraced  in  the  "History"  of  Mr.  Tooke  is  con 
sidered  under  the  following  divisions  of  time  :  — 


1 1793  to  1798 

2 1709  to  1803 

3 1804  to  1808 

4 1809  to  1813 

5 1814  to  1818 


6 1819  to  1822 

7 1823  to  1827 

8 1828  to  1832 

9 1833  to  1837 

10..  .  1838  to  1839 


These  periods  are  characterized  by  great  and  continual  flue- 
time,  and  as  nearly  as  possible  accurate  as  to  amount."  —  S.  J.  Loijd's 
Minutes  of  Select  Committee  on  Banks  of  Issue,  1840,  p.  260. 

1  A  strong  effort  was  made  to  break  Mr.  Tooke  down,  in  his  examination 
before  the  Committee  of  Secrecy  of  the  House  of  Commons  of  1832.  He 
was  called  up  many  times,  and  finally  put  to  the  test  of  a  severe  cross-ex 
amination  under  the  hands  of  some  well-prepared  opponent,  who  spared  no 
ingenuity,  and  no  effort,  to  involve  him  in  contradiction.  He  passed 
through  this  ordeal  with  dignity  and  firmness,  and  without  yielding  his 
opinions,  or  suffering  them  to  be  seriously  shaken.  —  See  Minutes  of  Com 
mittee,  12th  July,  1832  ;  Report,  p.  288,  &c. ;  Questions  3QG2  to  4117. 


MR.  TOOKE'S   OPINIONS.  571 

tuations  of  prices,  and  by  great  changes  in  the  quantity  of  paper 
currency ;  and  yet  the  clearest  proof  is  advanced  that  there  was 
no  close  nor  necessary  correspondence  between  these  fluctua 
tions  and  the  variations  in  the  amount  of  the  currency.  The 
opinion  of  the  author  will  be  found  in  a  summary  at  the  end  of 
each  chapter,  where  it  will  be  seen  he  very  emphatically,  in  every 
case,  denies  that  currency  regulates  prices.  He  avers  "  that 
the  alterations  of  prices  originated,  and  mainly  proceeded,  from 
alterations  in  circumstances  distinctly  affecting  the  commodi 
ties,  and  not  in  the  quantity  of  money."  "  There  is  not,"  he 
remarks,  "as  far  as  I  have  been  able  to  discover,  any  single 
commodity,  in  the  whole  range  of  articles  embraced  in  the  most 
extensive  list  of  prices,  the  variations  of  which  do  not  admit  of 
being  distinctly  accounted  for  by  circumstances  peculiar  to  it  ;" 
and  he  therefore  condemns,  as  wholly  erroneous,  the  resort  to 
the  state  of  the  currency  for  solution  of  the  phenomena  of 
prices.  He  does  not  deny  that  an  increase  of  money  may  have, 
in  many  instances,  a  tendency  to  enhance  prices,  and  that,  all 
other  things  being  equal,  it  would  not  in  all  instances  have  that 
tendency ;  but  he  maintains  that  the  quantity  of  the  currency 
is  not  a  controlling  regulator  of  prices,  these  being  mainly 
determined  by  facts  and  circumstances  peculiar  to  the  various 
commodities  whose  prices  are  affected ;  and  that  these  circum 
stances  do  frequently  operate  with  such  force  as  to  reduce 
prices  in  the  face  of  an  expanding  currency,  and  to  advance 
prices  when  the  currency  is  diminishing.  In  point  of  fact,  the 
expansion  of  currency  is  frequently  rather  an  effect  than  a 
cause  of  enhanced  prices. 

The  expression  of  these  opinions  by  Mr.  Tooke  before  the 
Secret  Committee  of  1832  on  Bank  of  England  Charter,  and 
the  Select  Committee  on  Banks  of  Issue  of  1840,  is  very  clear 
and  emphatic,  and  is  well  worth  consulting.  The  witnesses 
examined  before  those  committees  do  not  all  coincide  with  him, 
and  it  is  quite  plain  that  certain  members  of  those  committees 
do  not ;  yet  an  unprejudiced  inquirer  will  find  enough  in  their 
minutes  to  show  that  the  relation  between  the  quantity  of  cur 
rency  and  prices,  for  which  so  many  contend,  does  not  exist, 


572  PARLIAMENTARY    INQUIRY. 

and  is  nothing  else  than  the  old  notion  of  a  fixed  proportion  be 
tween  the  quantity  of  money  and  the  quantity  of  commodities.1 
It  is  worthy  of  notice  that,  in  1832,  the  greater  number  of 
the  witnesses  appeared  to  adhere  to  this  old  notion,  and  to  dis 
sent  from  Mr.  Tooke ;  whilst,  in  1840,  the  majority  of  voices  is 
the  other  way,  and  the  expression  of  opinion  is  strong  and  un- 
doubting.  In  1832,  eight  witnesses  were  examined  specially  on 
this  subject.  J.  Horsley  Palmer,  William  "Ward,  and  Samuel 
Gurney,  Esquires,  gave  it  as  their  opinion  that  an  increase  or 
diminution  of  bank  issues  might  eventually,  and  in  some  way, 
operate  upon  prices ;  but  they  spoke  with  hesitation,  and  quali 
fied  their  opinions  by  taking  into  the  account  other  causes. 
Joseph  C.  Dyer  and  James  Burt  were  clear  in  the  opinion  that 
prices  were  directly  regulated  by  the  issues  of  the  bank :  the 
latter  gentleman  was  asked :  "  You  mean  to  say,  that  the  prices 
and  the  markets  are  not  settled  by  the  demand  and  supply,  and 
by  what  may  belong  purely  to  the  trade,  but  by  the  issues  of 
the  Bank  of  England?  Yes,  I  do,"  George  Grote  wras  of 

1  It  is  strange  that  any  one  having  such  clear  and  well-defined  views  on 
the  subject  of  prices  and  paper  currency,  should  not  see  the  little  difference 
there  is  in  the  effect  of  metallic  and  paper  money  on  prices.  We  find  Mr. 
Tooke,  in  1840,  before  the  Select  Committee  on  Banks  of  Issue,  thus  ques 
tioned,  and  thus  answering:  — "  Suppose  the  supply  of  precious  metals  in 
the  world  to  be  increased,  and  to  go  on  doubling  and  trebling,  will  not  the 
prices  of  commodities  estimated  in  the  precious  metals  go  on  doubling  and 
trebling,  in  proportion  to  the  increase  of  the  precious  metals?  Yes,  they 
will,  undoubtedly."  Question  3300.  "  If  the  precious  metals  remain  con 
stant,  and  notes  payable  on  demand  be  issued,  will  prices  vary  with  the  in 
crease  of  such  notes  ?  Not  if  the  notes  are  payable  in  gold  on  demand,  ex 
cept  so  far  as  gold  may  be  affected  by  a  substitution  of  paper  for  gold." 
Question  3001.  If  Mr.  Tooke  had  examined  the  effect  of  metallic  currency 
with  the  same  attention  which  he  had  given  to  that  of  paper,  he  would  not 
have  made  that  distinction.  His  rule,  with  some  modifications,  is  equally 
applicable  to  money  and  its  substitutes. 

George  Grote  was  interrogated  specially  as  to  the  difference,  if  any,  of 
the  effect  of  metallic  and  paper  currencies  on  prices ;  and  gave  it  as  his 
opinion,  that  fluctuations  in  prices  were  as  likely  to  take  place  with  the  one 
as  the  other. —  Committee  on  Bank  of  England  Charter,  1832,  Question 
4775,  page  379. 


COMMITTEE    OX    BAXKS    OF    ISSUE  —  PRICES.     573 

opinion  that  fluctuations  in  prices  were  unavoidable,  and  as 
likely  to  take  place  under  a  metallic  as  a  paper  currency. 
Henry  Burgess  thought  that,  all  other  things  being  equal,  an 
increase  of  bank  issues  had  a  tendency  to  enhance,  and  a  dimi 
nution  to  reduce  prices. 

In  1840  and  1841,  thirteen  witnesses  were  specially  examined 
by  the  Select  Committee  on  Banks  of  Issue,  on  the  subject  of 
prices.  J.  B.  Smith,  R.  Cobden,  R.  Page,  and  G.  F.  Muntz, 
express  themselves,  with  more  or  less  qualification,  in  favor  of 
the  opinion  that  bank  issues  have  a  direct  and  controlling  influ 
ence  upon  prices.  "W.  R.  Wood  attributes  many  of  the  fluctua 
tions  in  prices  to  the  mismanagement  of  the  currency  under 
what  he  deems  a  vicious  banking  system.  G.  W.  Norman,  S.  J. 
Loyd,  T.  Tooke,.  H.  W.  Hobhouse,  V.  Stuckey,  W.  Rodwell,  J. 
W.  Gilbart  (author  of  various  treatises  on  banking),  and  A. 
Blair,  are  clearly  of  opinion  with  the  general  doctrine  of  Mr. 
Tooke,  in  his  "History  of  Prices."  This  opinion  gained  much 
ground  in  the  interval  between  1832  and  1841.  Can  there  be 
doubt  that  it  will  continue  to  gain  ground,  until  it  becomes  the 
settled  conviction  of  the  public  mind  ?  For,  after  all,  what  is  it 
but  the  doctrine,  that  whatever  may  be  the  tendencies  of  the 
expansion  or  contraction  of  paper  currencies,  there  are  other  and 
more  powerful  causes  continually  operating  upon  prices  which 
more  than  countervail  such  tendencies,  and  control  the  market 
value  of  all  articles  of  commerce? 

If  any  thing  of  fact  or  authority  had  been  wanting  to  over 
throw  the  doctrine  of  a  proportion  between  the  quantity  of 
circulating  medium  and  prices,  it  has  been  amply  furnished  in 
the  addition  which  has  been  made  to  the  metallic  medium  since 
the  discovery  of  the  gold-mines  of  California  and  Australia.1 

1  We  again  earnestly  commend  to  every  reader  who  may  be  still  clinging 
to  the  position  we  combat,  the  study  of  "  Tooke's  History  of  Prices."  It 
can  scarce  fail  of  carrying  conviction  to  every  candid  mind.  It  furnishes, 
in  the  appendix  to  the  second  volume,  tabular  statements  of  the  prices  of 
forty  different  articles,  four  times  a  year,  from  1782  to  1840 ;  also  tables  of 
the  circulation  of  bank-notes,  the  prices  of  bullion,  and  much  other  infor 
mation  bearing  on  the  subject.  No  refutation  of  the  doctrines  of  this  work 
has  ever  been  attempted,  and  no  one  has  questioned  the  accuracy  of  ita 


574   EFFECT  OF  CALIFORNIA  GOLD  ON  PRICES. 

The  annual  production  of  gold  has,  within  the  last  ten  years, 
increased  five-fold.  The  first  effect  of  this  extraordinary  influx 
was  an  increase  of  exports  to  the  gold-producing  countries. 
Commerce  experienced  a  great  impetus,  and  of  course  prices 
were  affected  by  increased  demand  and  greater  activity ;  a  con 
siderable  advance  took  place,  but  whether  that  advance  would 
average  10  or  80  per  cent.,  would  require  much  investigation  to 
ascertain.  How  much  of  this  advance  could  be  attributed  to  the 
mere  increase  of  money,  no  one  could  pretend  to  say ;  but  no 
observer  could  fail  to  see  that  the  enhanced  prices  were  to  be 
ascribed  chiefly  to  the  increased  activity  of  trade.  Certain  it  is, 
that  the  rise  in  prices  maintained  no  proportion  with  the  in 
creased  production  of  gold.  This  is  as  true  of  the  United 
States  as  of  Europe.  Something  like  such  an  advance  occurred 
in  California ;  but  that  rise  was  clearly  owing  to  the  condition 
of  a  new  territory,  in  which  the  demand  for  labor  was,  for  a  time, 
far  beyond  the  supply.  Prices  there  were  clearly  not  deter 
mined  by  the  quantity  of  gold,  but  evidently  by  the  quantity  of  the 
article  which  the  holders  of  the  gold  wished  to  purchase.  It  is 
known  that,  as  laborers  and  the  commodities  of  consumption  in 
creased,  the  prices  gradually  fell,  although  the  production  of 
gold  was  increasing.  It  is  probable  that  general  prices,  in  Cali 
fornia,  fell  50  per  cent,  during  a  period  in  which  the  production 
of  gold  increased  100  per  cent. 

But  leaving  out  of  view  the  extreme  case  of  California,  and 
regarding  results  in  the  United  States  after  business  had  sub 
sided  into  its  regular  channels,  the  following  figures  furnish  a 
comparison  between  the  years  1848  and  1856,  as  to  the  amount 
of  circulating  medium  in  the  United  States  :  — 

1848.  1856. 

Bank-notes $128,506,091  $214,778,822 

Bank  deposits 103,226,177  230,351,352 

Specie  in  the  banks 46,369,765  58,349,838 

Specie  iu  circulation' 32,133,688  138,268,850 


Total $310,235,721      $641,748,862 

statements.     No  person  who  wishes  to  be  right  on  the  subject  of  which  it 
treats,  is  excusable  for  neglecting  this  valuable  work. 

1  Estimated,  not  including  the  precious  metals  otherwise  employed. 


THE    WHOLE    VOLUME    OF    CURRENCY.  575 

This  exhibits  an  increase  of  the  mixed  currency  of  the  country 
of  over  100  per  cent. —  the  increase  being  above  that  rate  in  both 
specie  and  bank  currency. 

It  will  not  be  pretended  that  the  general  prices  of  this  country 
increased  in  this  ratio  between  1848  and  1856.  In  fact,  no  in 
crease  took  place  which  has  not  since  been  lost,  although  at  this 
moment  (1858)  the  specie  and  paper  currency  of  the  United 
States  are  each  double  what  they  were  in  1848. 

We  think  ourselves  authorized  to  leave  this  subject,  by  urging 
those  who  have  adhered  to  the  notion  that  there  is  a  necessary 
connection  and  proportion  between  the  quantity  of  the  currency 
and  general  prices,  to  give  up  a  fallacy  disproved  by  the  best 
authorities,  and  contradicted  by  the  results  of  the  influx  of  the 
precious  metals  from  the  mines  of  Spanish  America,  by  the  in 
crease  of  paper  currency  in  the  18th  century  and  since,  and  still 
more  emphatically  by  the  late  influx  of  gold  from  California  and 
Australia. 

There  are  many  who  believe  that  prices  in  this  country 
are  so  inflated  by  a  superabundant  currency,  as  seriously  to 
diminish  our  exports,  by  making  it  impossible  to  sell  many  pro 
ducts  of  our  industry,  in  foreign  countries,  without  loss.  These 
persons  contend  that,  if  our  paper  currency  were  banished,  prices 
would  fall  in  proportion,  and  then  we  could  manufacture  against 
the  world.  They  are  mistaken  in  the  supposition  that  prices 
would  fall,  upon  that  event,  in  any  such  proportion.  Even  if 
they  should,  the  paper  circulation  being  a  device  to  facilitate  the 
payment  of  debts  arising  upon  an  active  industry  and  trade,  the 
withdrawal  of  these  facilities  would  check  industry  and  trade ; 
and  the  result  would  be  not  merely  a  decline  of  prices,  but  a 
decrease  of  production  and  of  exports,  instead  of  an  increase. 

If,  however,  our  public  banks  were  wholly  discontinued,  it  is  be 
lieved  that  the  credit  system  could  be  worked  by  the  aid  of  private 
bankers,  to  such  an  extent  as  to  support  the  productive  industry  of 
the  country,  and  sustain  our  present  high  prices,  which  are  a  public 
benefit,  and  not  an  evil,  as  many  imagine.  Prices  are  the  scale  by 
which  labor  is  exchanged  —  the  scale  by  which  domestic  pro 
ducts  are  valued  and  distributed ;  and  there  are  very  few  con- 


576         HIGH    PRICES,   WHEN    AN    ADVANTAGE. 

sumcrs  who  do  not  receive  as  much  benefit  from  a  high  range 
of  prices  as  they  would  from  a  low  range,  especially  if  this  high 
range  enables  the  masses,  the  laborers,  the  actual  producers,  to 
purchase  and  enjoy  more  of  the  comforts  of  life  than  a  lower 
range.  It  is  not  the  nominal  price,  but  what  the  masses  are 
able  to  purchase  with  their  labor,  which  determines  whether  the 
range  of  prices  is  just  and  advantageous.  Those  who  find  them 
selves  paying,  for  some  articles  of  their  consumption,  a  higher 
price  than  the  same  could  be  purchased  for  abroad,  should  weigh 
that  disadvantage  against  the  advantage  to  the  laborers,  whose 
wages  go  to  make  up  the  increased  cost.  AVell-paid  laborers 
arc,  in  return,  liberal  in  their  expenditure ;  and  as  they  rise  in 
the  scale  of  comfort  and  knowledge,  they  impart  firmness  to  all 
the  institutions  of  society.  When  laborers  are  well  compensated, 
the  range  of  compensation  is  in  like  manner  favorable  to  every 
other  class  and  profession  in  the  country  they  inhabit. 


CHAPTER   XX. 

PUBLIC    PAYMENTS. 

I  1.  Processes  of  receiving  and  paying  —  British  Exchequer,  Us  practice  — 
Revenue  of  Great  Britain  Jive  millions  of  dollars  weekly  —  Exchequer  bills 
introduced  by  Earl  of  Halifax  —  British  revenue  always  anticipated  — 
Floating  debt  a  saving  of  interest  —  Exchequer  bills  suited  to  a  certain 
class  of  lenders  —  The  quantity  carefully  gauged  to  the  demand  —  Wisely 
managed  by  the  Bank  of  England — The  great  advantage  of  disbursing 
the  revenue  before  its  receipt,  and  of  thus  furnishing  the  currency  in  which 
the  revenue  is  paid — Amount  of  Exchequer  bills  issued — Mode  of  reducing 
circulation  by  sale  of  Exchequer  bills  —  Rate  of  interest  —  Printed  in  dif 
ferent  colors  —  The  Exchequer  and  the  Bank —  British  system  in  contrast 
with  that  of  the  United  States. 

THERE  are  some  aspects  in  which  payments  by  public  trea 
suries  come  within  the  scope  of  our  subject.  We  propose  to  con 
sider  neither  the  objects  nor  modes  of  taxation,  nor  the  occa 
sions  of  national  expenditure ;  but  as  public  treasuries  receive 
and  pay,  it  becomes  with  them,  as  with  individuals,  important 
to  avail  themselves  of  whatever  facilities  they  can  in  the  way  of 
economy,  of  promoting  expedition,  and  of  preventing  friction. 
The  subjects  of  taxation,  public  revenue  and  expenditure,  have 
engaged  the  attention  of  multitudes  of  public  men ;  but  whilst 
so  much  has  been  written  and  said  upon  these  topics,  the  more 
mechanical  or  practical  processes  of  receiving  and  paying  have 
received  much  less  notice  than  they  deserve. 

As  the  practice  of  the  British  Exchequer  presents  that  aspect 
of  the  subject  which  we  desire  to  bring  before  the  reader,  we 
shall  first  briefly  advert  to  the  system  which  prevails  in  Great 
Britain.  The  public  income  of  that  country  exceeds  that  of  all 
other  nations,  in  proportion  to  the  population.  In  1801,  the 
total  amount  of  the  annual  taxes  paid  by  the  people  of  Great 
3T  (577) 


578  EXCHEQUER    BILLS. 

Britain  exceeded  §200,000,000.  In  1816,  it  had  risen  to  up 
wards  of  $415,000,000;  from  that  period  to  1850,  it  mairitained 
an  average  of  over  $250,000,000,  or  somewhat  over  $5,000,000 
each  week.  It  does  not  concern  us  now  to  notice  from  what 
sources,  or  by  what  means,  this  vast  sum  is  levied,  nor  the 
various  processes  by  which  it  is  collected.  Independent  of  the 
mode  of  collection,  and  of  the  particular  interests  affected  by 
this  heavy  taxation,  the  mere  act  of  receiving  and  paying 
$5,000,000  weekly  is  an  important  financial  operation;  and  the 
mode  of  conducting  such  large  receipts  and  payments  may  much 
enhance  or  diminish  the  burden  of  the  payers.  The  withdrawal 
of  $5,000,000  each  week  from  the  pockets  of  the  people,  and 
placing  it  in  the  public  treasury,  is  an  operation  calculated  to 
affect  very  seriously  the  movements  of  business.  It  should  be 
done,  then,  other  considerations  not  being  overlooked,  in  the 
mode  least  likely  to  do  injury.  The  business  is  unavoidable;  but 
every  palliative  should  be  sought,  for  a  process  which  must  be 
hard  enough  under  any  circumstances. 

As  late  as  the  beginning  of  the  18th  century,  deposits  in  the 
British  Exchequer  were  certified  by  tallies,  or  sticks  split  and 
notched  in  the  manner  in  which  bakers  and  their  customers  keep 
their  accounts  of  loaves  delivered  ;  these  were  the  securities 
issued  by  the  British  Exchequer,  until  the  present  device  of 
Exchequer  bills  was  introduced  by  Montague,  Earl  of  Halifax, 
at  the  time  of  the  great  financial  difficulties  attendant  upon  the 
recoinage,  and  the  over -issues  of  the  Bank  of  England  to  the 
government  in  the  first  years  of  its  existence.  From  that  time 
to  the  present,  the  Exchequer  bills,  then  so  useful,  have  been 
a  prominent  feature  of  the  British  system  of  finance.  It  may  be 
safely  asserted,  indeed,  that  this  system  of  Exchequer  bills,  as 
conducted  between  the  Exchequer  and  the  Bank  of  England,  is 
one  of  the  main  props  of  British  finance,  without  which  its 
enormous  burdens  could  not  be  borne,  nor  the  income  main 
tained.  The  history  of  British  finance  is  interesting  throughout; 
but  the  agency  of  Exchequer  bills,  and  notes  of  the  Bank  of 
England,  as  employed  from  year  to  year,  in  aid  of  the  treasury, 
is  what  we  commend  to  the  attention  of  the  reader. 


THE    BRITISH    EXCHEQUER.  579 

There  is  a  great,  and  indeed  unnecessary,  complication,  in 
Great  Britain,  in  the  management  and  appropriation  of  the 
various  branches  of  income  to  the  various  items  of  public  ex 
penditure.  This  arises,  in  part,  from  ancient  usages,  and  in 
part  from  the  necessity  of  complying  with  many  acts  of  Parlia 
ment,  passed  at  different  periods,  and  not  always  consistent  or 
harmonious  in  their  details.  The  following  are,  however,  always 
prominent  items  of  payment :  the  interest  of  the  national  or 
funded  debt ;  the  interest  and  principal  of  the  unfunded  debt ; 
the  annual  expenditure  upon  the  civil  list  for  the  army,  navy, 
and  other  expenses  of  yearly  occurrence.  These  together  absorb 
the  annual  sum  of  $250,000,000,  and  upwards.  For  a  very 
large  proportion  of  this  vast  sum,  the  public  treasury  issues  its 
notes,  or  Exchequer  bills,  in  anticipation  of  the  receipt  of  the 
revenue ;  and  this,  whether  the  income  upon  which  the  advance 
is  made  be  applicable  to  the  permanent  debt  or  interest  of  the 
funded  debt,  or  to  the  unfunded  debt,  or  to  the  accruing  ex 
penses  of  every  year,  independent  of  interest  or  debt.  It  is  the 
settled  practice  of  the  British  Exchequer  thus  to  anticipate  the 
incoming  taxes ;  that  is,  to  borrow  the  amount,  pay  the  demands 
upon  the  public  treasury  as  they  accrue  and  are  payable,  and 
return  the  borrowed  funds  out  of  the  taxes  as  they  come  in. 
Two  important  advantages  arise  from  this  process ;  a  large  sum 
of  floating  debt  is  carried  at  a  less  rate  of  interest  than  that  for 
which  it  could  be  funded  as  a  part  of  the  permanent  debt ;  and 
the  whole,  or  a  large  proportion,  of  the  amount  of  the  annual 
expenditures  is  actually  paid  by  the  government  to  the  people 
before  they  are  called  upon  to  pay  their  taxes. 

But  the  mere  circumstance  of  carrying  the  floating  debt  at  a 
lower  rate  of  interest  would  not  suffice  to  justify  the  plan.  It  is 
a  great  advantage,  that  the  floating  debt,  thus  managed,  forms 
a  perfectly  safe  reservoir  into  which  to  pour  any  temporary  or 
occasional  surplus  of  income.  If  the  treasury  should  overflow, 
even  for  half  a  year,  all  this  surplus  would  be  at  once  applied  to 
payment  of  so  much  of  the  floating  or  unfunded  debt.  This  sur-r 
plus  would  be  applied  to  the  payment  of  Exchequer  bills,  for 
which  no  corresponding  amount  would  be  issued  until  the  money 


580      EXCHEQUER    BILLS    AS    AN    INVESTMENT. 

was  wanted.  The  Exchequer  carries,  in  this  way,  a  floating 
debt  of  from  £10,000,000  to  £30,000,000  sterling,  which  is 
more  or  less,  according  to  the  productiveness  of  the  annual 
revenue.  This  large  sum  is  secured,  at  all  times,  by  Exchequer 
bills,  which  are  paid  off  quarterly,  semi-annually,  or  annually ; 
but  so  distributed  as  to  be  paid  off  a  portion  in  each  quarter  of 
the  year.  After  a  specified  time,  a  portion  of  them  are  receiva 
ble  in  payment  of  taxes  or  customs.  They  are  issued  in  sums  of 
£100,  .£500,  and  of  £1000,  and  each  bill  bears  a  fixed  daily  rate 
of  interest,  which  the  government  can  increase  by  proclamation, 
as  is  done  when  there  is  danger  of  their  being  returned  too 
rapidly  to  the  treasury  for  payment.  Exchequer  bills  have  long, 
and  deservedly,  been  a  favorite  security  for  temporary  invest 
ments  The  experience  of  more  than  a  century  has  taught  the 
people  that  they  are  faithfully  managed ;  their  credit  has  been 
so  carefully  maintained,  that  they  are  at  all  times  saleable.  The 
amount  kept  on  the  market  is  strictly  gauged  to  the  demand : 
if  at  any  time  it  is  found  to  be  so  great  as  to  weigh  upon  the 
demand,  or  check  their  ready  sale,  a  portion  is  immediately 
withdrawn  or  funded.  The  quantity  of  Exchequer  bills  in  the 
hands  of  the  people  is  large  enough  to  keep  them  before  the 
public  as  at  all  times  an  accessible  security,  and  as  safe  as  the 
nation  itself.  Thus  managed,  Exchequer  bills  become  an  im 
portant  and  sure  resource  for  the  government  in  every  emer 
gency,  for  every  sudden  demand  upon  the  treasury,  whether 
ordinary  or  extraordinary. 

There  is  always,  in  a  rich  country  like  Great  Britain,  a  vast 
amount  of  funds  applicable  to  payments,  public  and  private,  of 
which  the  owners  can  dispose  for  a  longer  or  shorter  time,  but 
which  they  cannot  permanently  invest.  Every  one  who  can 
spare  £100,  or  £1000,  for  a  week,  or  a  month,  or  six  months, 
or  a  year,  is  glad  to  avail  himself  of  the  facility  of  an  Exchequer 
bill.  They  are  almost  always  at  a  premium  ;  and  the  only  risk 
run  is,  that  at  the  sale  a  less  premium  may  be  obtained  than 
that  which  was  paid  at  the  purchase.  It  should  be  noted,  that 
the  class  of  lenders  to  which  Exchequer  bills  appeal  are  such  as 
would  be  less  tempted  by  any  other  security.  They  would  not  lend 


ADVANTAGES    TO     THE     GOVERNMENT.  581 

the  money  they  thus  invest  upon  mortgages,  nor  upon  commer 
cial  paper,  nor  upon  public  stocks,  or  private  enterprises  of  any 
description.  Upon  all  these,  apart  from  other  risks,  there  is 
greater  hazard  of  fluctuation,  which  might  absorb  much  more 
than  all  the  profits  of  a  short  investment.  The  fluctuation  of 
Exchequer  bills  has  so  narrow  a  range,  that  the  most  timid 
would  never  fear  the  loss  of  not  only  interest,  but  a  part  of  the 
capital.  The  British  Exchequer  furnishes  a  security  based  upon 
the  faith  of  the  nation,  under  the  careful  management  of  the 
Bank  of  England,  exactly  suited  to  this  class  of  lenders.  No 
thing  could  be  devised,  better  suited  to  their  position  and  wants. 
The  funds  they  have  to  spare  are  cheerfully  and  promptly  ex 
changed  for  Exchequer  bills ;  and  for  every  sum  thus  loaned, 
the  lender  obtains  as  many  days'  interest  as  it  is  out  of  his 
hands.  There  is,  then,  in  Great  Britain,  a  fund  of  some 
£20,000,000  to  £30,000,000  sterling  at  all  times  subject  to  the 
call  of  the  government  and  Bank  of  England,  upon"  this  form  of 
security.  Even  in  times  of  great  commercial  distress  and  pres 
sure,  Exchequer  bills  are  in  demand ;  because,  the  greater  the 
distrust  of  individuals,  the  greater  the  disposition  to  resort  to 
public  securities.  It  is  very  true,  however,  that  the  success  of 
this  whole  device  of  Exchequer  bills  has  depended,  from  the  be 
ginning  in  1696  down  to  the  present  day,  upon  the  Bank  of 
England,  which  has  long  had  the  actual  management  of  the 
public  debt  of  Great  Britain.  The  delicacy  and  care  necessary 
to  regulate  the  issues  of  Exchequer  bills  could  only  be  appre 
ciated  by  a  great  bank,  or  similar  institution,  placed  in  intimate 
relations  with  the  capitalists  of  a  country ;  no  mere  public 
agents,  or  officers  of  a  national  treasury,  could  ever  have 
managed  such  an  issue  of  Exchequer  bills  as  that  which  the 
Bank  of  England  has  controlled,  from  the  very  year  in  which 
it  was  founded. 

This  success  has  enabled  the  government  of  Great  Britain  not 
only  to  meet  all  the  regular  demands  upon  the  Exchequer  with 
complete  promptitude,  but  to  encounter  great  emergencies  with 
wonderful  ease  and  efficiency.  It  has  not  only  met  the  extra 
ordinary  expenditure  of  the  American  Revolution,  and  the  wars 


582  SPECIAL    AID    FROM     THE     PUBLIC. 

following  upon  the  French  Revolution,  continuing  through  a 
period  of  forty  years,  but  during  that  time  it  furnished  immense 
sums  in  the  way  of  loans  and  subsidies  to  other  European 
Powers.1  By  the  aid  of  this  well-devised  security,  and  the 
judicious  management  of  the  Bank  of  England,  the  government 
was  never  without  available  resources  on  the  most  trying  occa 
sions;  it  was  often  saved  from  such  financial  movements  as  can 
not  but  create  alarm.  The  Exchequer  bills  were  always  in  circu 
lation,  and  an  extraordinary  issue  could  be  managed  with  little 
disturbance  of  the  money-market.  Not  only  so,  but  the  facility 
thus  enjoyed  between  capitalists  and  the  government  no  doubt 
induced  and  enabled  the  government  to  extend  special  pecuniary 
assistance  in  cases  of  great  emergency.  In  57th  of  George  III., 
an  act  was  passed,  establishing  a  board  of  loan  commissioners, 
who  were  to  have  charge  of  the  business  of  furnishing  special 
relief  out  of  public  funds,  or  by  the  help  of  public  credit.  This 
act  "  authorized  the  issue  of  Exchequer  bills,  and  the  advance 
of  money  out  of  the  consolidated  fund,  to  a  limited  amount,  for 
the  carrying  on  public  works  and  fisheries  in  the  United  King 
dom,  and  in  affording  employment  to  the  laboring  classes,  under 
the  then  circumstances  of  the  country."  Under  this  and  other 
provisions  of  law,  vast  sums,  besides  the  ordinary  taxation,  were 
raised  and  applied  to  special  purposes.  Relief  to  Ireland, 
relief  to  the  West  Indies,  as  well  as  to  those  needing  it  at  home, 
was  largely  afforded,  to  the  amount  of  scores  of  millions  of 
pounds  sterling.  Under  the  management  of  the  bank,  a  very 
small  advance  in  the  rate  of  interest  upon  Exchequer  bills  sufficed 
to  call  forth  large  sums ;  but  this  store  of  capital  was  carefully 
husbanded  by  the  Exchequer  and  the  bank ;  if  drawn  upon  too 
heavily,  it  might  have  been  exhausted,  or  such  a  rise  in  the  rate 
of  interest  might  have  occurred  as  could  not  easily  have  been 
reduced.  This  large  fund,  thus  held  at  the  disposal  of  the 
British  Exchequer,  is  an  affair  altogether  unique ;  it  has  no 

1  Between  1793  and  1814,  loans  and  subsidies  were  granted  to  foreign 
Powers  to  the  amount  of  over  $230,000,000.  The  whole  expenditures,  be 
tween  those  periods,  varied  from  $120,000,000  to  $530,000,000  yearly. 


ANTICIPATION     OF    THE    REVENUE.  583 

parallel  in  any  country.1  It  requires  consummate  management 
to  sustain  it,  and  a  vast  substratum  of  industrial  and  commercial 
wealth  to  serve  for  its  foundation.  We  look  upon  it  as  a  finan 
cial  achievement  of  the  highest  order  —  as  a  facility  and  advan 
tage  beyond  estimate.  It  may  be  objected,  that  it  encourages 
extravagance,  and  facilitates  going  in  debt :  it  may  be  so ; 
being  a  machine  of  great  power,  it  should  only  be  in  wise,  skil 
ful  and  virtuous  hands.  But  it  seems  very  certain  that  the 
public  debt  of  Great  Britain  would  have  proved  a  burden  too 
great  to  be  endured,  but  for  this  facility ;  and  it  is  still  more 
certain  that  the  annual  income  of  that  country  could  not,  for 
many  successive  years,  be  collected  without  great  oppression  of 
the  tax-payers,  but  for  this  well-fostered  device  of  Exchequer 
bills. 

The  main  advantage  in  employing  Exchequer  bills  does  not, 
however,  arise  from  the  ready  access  they  give  to  a  large 
amount  of  funds,  which  no  other  security  can  so  readily  com 
mand,  nor  from  the  fact  that  they  can  be  always  purchased  by 
those  who  wish  to  have  them,  and  always  sold  by  those  who  wish 
to  realize,  nor  because  the  fluctuations  are  confined  to  so  narrow 
a  range  as  to  cause  no  apprehension  among  holders :  the  chief 
advantage  lies  in  this,  that  as  the  collection  of  the  British  reve 
nue  involves  a  payment  into  the  public  coffers  of  £1,000,000 
sterling  weekly,  or  §5,000,000,  the  withdrawal  of  which,  week 
after  week,  would  be  sensibly  if  not  severely  felt  in  the  channels 
of  business  :  all  this  is  avoided  by  the  use  of  Exchequer  bills. 
They  enable  the  government  to  borrow  the  entire  sum  re 
quired  for  the  current  payments  of  the  treasury,  and  to  disburse 
to  the  public  creditors  the  whole  amount  of  the  incoming  reve 
nue,  before  its  regular  receipt  into  the  Exchequer.  The  govern 
ment,  by  this  means,  avoids  even  the  temporary  withdrawal  of 
the  currency  employed  in  business ;  it  draws  the  sums  required 
for  current  payments  from  a  vast  mass  of  funds,  which,  for  a 
time,  would  otherwise  remain  unemployed ;  and  disburses  the 

1  Some  advantages  of  this  kind  have  been,  for  the  last  twenty  or  thirty 
years,  attained  by  the  treasury  of  France,  but  by  a  very  different  process. 


584     THE    REVENUE    DISBURSED,    THEN    COLLECTED. 

notes  of  the  Bank  of  England,  thus  obtained,  wherever  the  pub 
lic  money  is  payable.  The  expenditures  come  first ;  the  pay 
ments  into  the  treasury  follow.  The  most  effective  mode  of 
diminishing  the  burden  of  taxation  is,  no  doubt,  to  secure  a 
proper  distribution  of  industry,  and  proper  facilities  for  inland 
and  foreign  trade ;  but  as  an  alleviation  in  the  mere  process  of 
collecting  revenue,  we  cannot  conceive  any  thing  greater  than 
the  mode  of  first  distributing,  and  then  subsequently  collecting 
the  public  revenue.  If  the  amount  must  first  be  collected,  and 
then  paid,  it  would  involve  a  detention  of  money  in  the  treasury 
of  several  weeks,  or  months,  or  even  more ;  for  money  must,  in 
that  case,  be  kept  in  the  treasury,  for  emergencies,  during 
the  examination  of  accounts,  and  to  meet  drafts,  the  time  of  the 
presentation  of  which  is  uncertain.  It  is  on  record  that  the 
British  Exchequer,  previous  to  the  introduction  of  Exchequer 
bills,  was  obliged,  from  time  to  time,  to  give  notice  when  debts 
of  a  particular  description  could  be  paid ;  as,  for  instance,  all 
between  <£10  and  <£50  after  a  day  mentioned.1  The  present  sys 
tem  ensures  punctual  and  prompt  payment  of  public  dues,  and 
secures  that  economy  which  prompt  payment  always  brings  with 
it,  together  with  that  high  degree  of  credit  which  promptness 
and  punctuality  never  fail  to  command. 

Whatever  complications  and  useless  machinery  may  be  con 
nected  with  this  feature  of  British  finance,  we  think  that  it  sur 
passes,  in  advantage  to  the  government  and  to  the  people,  any 
other  known  system.  The  British  government  thus  avoids  draw 
ing  money  from  the  channels  of  business,  and  locking  it  up  for 
months  in  the  Exchequer ;  it  avoids  checking  the  circulation  of 
money ;  it  avoids  disturbing  the  payments  of  trade ;  but,  on 
the  contrary,  takes  up  weekly  a  million  sterling  from  individual 
holders  who  would  otherwise  not  employ  it ;  it  diffuses  this 
large  sum  throughout  the  country,  wherever  the  public  pay 
ments  carry  it ;  it  very  wisely  pays  interest,  for  a  few  months, 
on  the  current  expenditures,  as  a  measure  of  relief  to  the 
public  debtors,  and  of  favor  to  public  creditors,  strengthening, 


Holt's  Dictionary  of  Trade,  in  folio,  Art.  "  Exchequer." 


AMOUNT    OF    EXCHEQUER    BILLS    ISSUED.      585 

at  the  same  time,  that  public  credit  on  which  the  measure  is 
founded.1 

The  importance  of  avoiding  the  withdrawal,  from  the  general 
circulation,  of  so  large  a  strai  as  a  million  sterling  each  week, 
especially  in  a  country  in  which  debts  are  chiefly  paid  by  the 
proceeds  of  discounted  paper,  is  greater  than  some  may  imagine. 
To  a  certain  extent,  we  know  the  fund  created  by  discounted 
commercial  paper  can,  wTith  great  advantage,  be  used  as  a  sub 
stitute  for  money ;  but  every  use  which  diverts  it  long  from  its 
legitimate  purpose  of  paying  the  debts  created  by  its  issue  is  at 
the  hazard  of  creating  pressure  in  the  money-market.  If  the 
government  should  intervene,  and  take  a  million  each  week,  and 
retain  it  for  an  average  of  only  one  or  two  months,  it  could  not 
be  attended  with  but  damaging  pressure.  Every  discounted 
note  or  bill  must  be  paid,  and  it  requires  the  amount  issued  for 
it  to  pay  it  and  the  amount  of  the  discount  beside :  the  fund 
created  by  these  discounts  may  be  employed  as  a  substitute  for 

1  The  extent  to  which  Exchequer  bills  are  employed  in  Great  Britain 
•will  appear  from  the  following  statement.*  The  amount  outstanding  on  a 
particular  day,  in  each  of  the  years  mentioned,  with  the  whole  interest 
paid  on  them  that  year,  stands  thus :  — 

Years.                                                   Amounts  outstanding.  Interest  paid. 

1836 £28,155,150  

1838 24,026,050  £720,928 

1840 21,626,350  642,947 

1842 18,182,100  896,464 

1844 18,404,500  531,843 

1846 18,310,700  421,432 

1847 17,946,500  436,298 

•      1850 606,025 

1854 490,461 

1855 814,221 

1856 818,403 

The  whole  amounts  issued  in  the  following  periods  are  as  follows  :  — 

Years.                                Whole  amounts.  Average  yearly  issue.  Whole  interest. 

1793  to  1802 £155,715,800              £15,571,580  £6,788,623 

1803  to  1816 550,853,900                 36,723,593  24,760,901 

1817  to  1826 325,380,300                 32,538,000  12,096,997 

*  Political  Dictionary,  vol.  ii.  p.  852;  British  Almanac,  Finance  Accounts;  Mar 
shall's  Statistics,  p.  192. 


586       PUBLIC    DEPOSITS,    A    CREDIT    IN    BANK. 

money,  while  the  paper  discounted  is  running  to  maturity ;  but 
if  it  is  withdrawn  by  speculation,  or  by  payment  of  taxes,  from 
its  ordinary  channels  of  circulation,  disturbance  and  pressure 
must  ensue.  The  readiness  with  which  the  proceeds  of  dis 
counted  paper  is  received,  in  Great  Britain,  in  place  of  money, 
furnishes  many  wrays  in  which  such  funds  may  stray  away,  or 
be  diverted  from  their  proper  uses.  This  perversion  being,  as 
we  have  shown,  a  principal  evil  of  the  credit  system,  it  is  a  wise 
and  provident  feature  of  the  British  financial  system,  that  it 
does  not  add  the  whole  income  of  the  nation  to  the  other  modes 
and  occasions  of  drawing  off  the  bank  deposits,  thus  reducing 
the  amount  applicable  to  the  current  payments  of  business. 

We  have  said  that  the  sums  borrowed  by  the  government  are 
drawn  from  a  class  of  persons  who  would  not  otherwise  have 
employed  them.  The  government,  therefore,  avoids  taking  from 
a  fund  which  is  active,  and  needed  where  it  is ;  and  it  draws 
forth,  into  active  service,  one  which  would  not  be  used.  It 
leaves  XI, 000, 000  sterling  every  week  in  its  proper  channels,  to 
do  its  proper  work,  and  throws  into  circulation  ,£1,000,000 
which  would  otherwise  do  little  or  nothing.  It  is  not  difficult  to 
divine  how  this  policy  not  only  renders  the  collection  of  the 
revenue  less  difficult  and  expensive,  but  how  it  increases  the 
amount,  and  strengthens  and  fosters  all  the  sources  of  revenue. 
Instead  of  drawing  money  from  the  business  of  the  country,  and 
locking  it  up  for  months  unemployed,  it  is  drawn  from  the 
recesses  of  capitalists,  and  cast  into  the  current  of  trade  and  in 
dustry,  months  before  the  revenue  is  exacted. 

It  must  not  be  supposed  that  the  large  deposits  of  the  public 
in  the  Bank  of  England  detracts  from  this  view.  These  depo 
sits  are,  for  the  most  part,  but  credits  given  by  the  bank  to  the 
Exchequer,  upon  the  credit  of  the  bills.  The  Exchequer  issues 
the  bills,  which  are  either  discounted  directly  by  the  bank,  or 
sold  by  the  latter,  and  the  proceeds  carried  to  the  credit  of  the 
government,  in  its  various  departments  of  public  expenditure. 
It  is  not  the  money  collected  which  figures,  for  the  most  part, 
as  a  credit  to  the  public,  but  the  fund  which  is  borrowed. 
The  bank  itself  being  a  continual  lender  to  the  government,  by 


OPPONENTS     OF    THE    BANK.  587 

the  purchase  of  Exchequer  bills,  the  public  deposits  are,  in  fact, 
only  a  credit  on  the  books  of  the  bank.  These  credits  appear,  in 
the  statements  of  the  bank,  as  deposits  of  public  money ;  when 
they  are,  for  the  most  part,  only  a  privilege  of  drawing  at  plea 
sure  upon  the  bank  for  the  amount  of  a  credit. 

We  need  not  dwell  upon  these  financial  advantages ;  they  are 
obvious,  upon  a  little  reflection.  Grumblers  are  found  in  every 
country  among  tax-payers ;  and  as  the  people  of  Great  Britain 
are  heavily  burdened,  the  grumblers  are  not  scarce.  Tax-payers 
do  not  often  appreciate  the  merits  of  their  revenue  system ;  what 
is  wrong  or  disagreeable  they  are  ever  ready  to  specify  and 
denounce,  but  seldom  do  full  justice  to  that  which  is  commend 
able.  Men  do  not  always,  in  Great  Britain,  measure  the  alle 
viation  afforded  by  the  system  of  Exchequer  bills,  nor  perceive 
that,  but  for  this  relief,  the  burden  of  taxation  might  be  not  only 
heavier,  but,  perhaps,  unendurable.  The  Bank  of  England  has 
been  steadily  denounced,  during  its  whole  existence,  by  a  large 
class  of  these  tax-payers,  who  stand  ready,  with  all  the  power  and 
ingenuity  they  can  bring  to  bear,  to  crush  that  institution.  What 
ever  may  be  the  faults  in  the  constitution  or  management  of  the 
bank,  and  in  the  former  respect  the  defects  are  important,  it 
may  be  asserted  that  the  public  is  more  than  repaid  all  it  suffers 
in  sustaining  the  bank,  by  this  system  of  Exchequer  bills,  which 
the  bank  is  mainly  instrumental  in  upholding.  The  truth  is,  no 
national  treasury  has  ever  elsewhere  established  and  maintained 
an  issue  of  securities  similar  to  the  Exchequer  bills,  for  a  third 
of  the  time  during  which  they  have  been  successfully  employed. 

To  employ  them  with  success  requires  the  two  main  conditions 
which  sustain  them  in  Great  Britain  —  the  ultimate  security 
afforded  by  the  public  faith  and  national  wealth,  and  the  imme 
diate  security  of  a  great  institution  of  credit,  having  relations 
with  the  general  business  of  the  country,  to  insure  punctuality 
and  regular  modes  of  proceeding.  Where  men  are  willing  to 
make  their  bank  deposits,  they  are  willing  to  lend.  Men  of 
business  will  confide  in  the  security  of  the  nation,  but  they  pre 
fer  the  punctuality  and  processes  of  a  bank  when  their  money 
is  in  question.  A  bank  can  approach  these  lenders  with  perfect 


588     EXCHEQUER    BILLS  —  RATE     OF    INTEREST. 

confidence ;  but  the  treasury,  without  this  agency,  can  only  go 
into  the  money-market  for  permanent  loans.  But  even  in  this 
respect  the  floating  debt,  upon  the  security  of  Exchequer  bills, 
affords  a  great  facility  when  a  permanent  loan  is  contemplated. 
The  Exchequer  bills  are,  in  due  course,  always  paid  off  every 
year ;  the  holders  are  compelled  to  present  them,  for  that  pur 
pose,  at  the  time  appointed,  or  thereafter  lose  their  interest. 
But  when  a  loan  is  wanted,  a  certain  portion  of  the  holders  of 
Exchequer  bills  are  always  found  ready  for  permanent  invest 
ment,  and  the  loan  is  soon  filled.  'i 
They  are  issued  in  sums  of  £100,  £200,  £500  and  £1000. 
Each  denomination  is  printed  in  different  colored  ink  —  the 
£100  in  red,  £200  in  yellow,  £500  in  blue,  and  the  £1000  in 
black.  They  bear  interest  at  a  certain  rate  per  cent,  per  day, 
that  rate  continuing  until  the  day  of  payment,  which  is  fixed  by 
public  notice.  They  are  generally  paid  off  within  the  year  in 
which  they  are  issued ;  and  as  they  are  frequently  issued,  the 
process  of  payment  also  goes  on  by  discharge  of  a  certain  por 
tion  every  quarter.  Lenders  thus  find  a  continual  supply  of 
new  Exchequer  bills  in  which  to  invest;  and  they  are  con 
stantly  assured,  by  notices  to  holders  of  a  certain  description 
of  them  to  come  forward  and  be  paid,  that  the  security  is  good, 
and  the  payment  sure.  Holders  neglecting  to  present  their  bills 
at  the  time  fixed  in  the  notice,  lose  interest  until  new  bills  are 
issued,  applicable  to  their  case.  Exchequer  bills  are  transferable 
by  delivery  only.  The  usual  rate  of  interest,  for  many  years, 
has  been  from  2J  to  3}  per  cent. ;  but  the  rate,  at  times,  is 
much  above  this,  and  the  Exchequer  occasionally  raises  the  in 
terest  upon  bills  already  in  circulation.  As  they  are  receivable, 
after  a  certain  time  expressed,  in  payment  of  taxes  and  dues  to 
the  government,  the  raising  the  interest  prevents  that  use  of 
them,  and  also  prevents  their  being  presented  for  payment.1 

1  At  the  usual  rates  of  interest  per  day,  the  rate  per  year  is  as  follows : 
IJrf.  per  day  is  equal  to  £2     5*.     1\d.  per  year. 
1|  "  "        2  13       2|  " 

2  «  "        3     0     10  " 
2i          "                     "        3  16       Oi           " 

3  "  "         4  11        3  " 


ADVANCES    BY    THE    BANK. 

The  bills  are  of  various  classes,  well  defined  on  their  face,  and 
understood  by  those  among  whom  they  circulate.  Those  given 
for  the  unfunded  debt  are  not  receivable  in  payment  to  the 
government  until  a  year  after  they  are  issued ;  but  they  are, 
twice  a  year,  advertised  to  be  paid  off,  or  rather  exchanged,  on 
certain  days,  after  which  interest  ceases,  if  not  presented. 

The  Bank  of  England  is  generally  a  large  holder  of  Exche 
quer  bills  ;  no  kind  of  security  can  be  more  acceptable  to  it,  as 
a  reserve  of  strength  and  protection  in  case  of  emergency.  The 
government  is  deeply  interested  to  maintain  their  credit,  and 
the  bank  has  no  less  interest,  because  the  business  of  the  Exche 
quer  is  as  important  to  that  institution  as  its  management  of 
financial  matters  is  to  the  government.  The  bank  advances, 
upon  Exchequer  bills  every  year,  nearly  the  whole  expenditure 
of  the  government ;  it  is  always  ready  to  furnish  the  needful 
means,  either  directly,  or  by  negotiation  of  these  securities. 
The  public  revenue  being  receivable  in  bank-notes,  at  the  rate 
of  a  million  sterling  weekly,  the  notes  issued  by  the  bank  on 
the  credit  given  to  the  government,  are  returned  at  about  the 
same  rate  weekly  at  which  they  are  issued  ;  that  is,  if,  upon  any 
particular  branch  of  the  revenue,  the  bank  at  the  beginning  of  a 
quarter  grants  to  the  government  a  credit  of  .£5,000,000,  to  be 
drawn  for  as  needed,  the  sums  drawn  upon  this  credit  will  be 
distributed  over  the  whole  quarter,  and  the  revenue  for  the  same 
period,  upon  the  same  branch,  will  be  returning  an  equivalent 
amount  of  the  bank-notes  issued  upon  the  drafts  of  the  govern 
ment.  The  bank,  in  making  these  advances,  runs  less  risk  of 
over-issue  or  overcharging  the  currency,  than  may  be  supposed ; 
it  is  only  issuing  bank-notes  to  an  amount  required  by  the  tax 
payers,  for  the  very  purpose  of  immediate  payment  to  the 
government.  With  the  notes  thus  returned,  the  government 
takes  up  the  Exchequer  bills  upon  which  the  advance  was  made. 
In  the  mean  time,  the  bank  counts  and  charges  interest  on  these 
bills  to  the  stated  day  of  payment. 

The  amount  of  bank-notes  issued,  in  making  these  advances, 
may  remain  in  circulation  one  week,  or  four,  or  eight ;  the  more 
abundant  the  issue,  the  more  rapidly  will  the  public  revenue  be 


590  MODE    OF    REDUCING    CIRCULATION. 

paid,  for  the  money-market  will  be  well  supplied.  The  actual 
advance  by  the  bank  in  notes,  upon  a  credit  of  £5,000,000,  may 
not  exceed  £1,000,000  or  £2,000,000  at  any  one  time;  the  in 
terest,  however,  of  the  £5,000,000  will  have  run  on  steadily  in 
favor  of  the  bank.  Of  course  this  is  a  desirable  kind  of  busi- 
siness  for  the  bank ;  we  believe  it  is  equally  so  for  the  people 
and  the  government.  It  affords  the  bank  another  advantage. 
In  case  of  an  unfavorable  foreign  exchange,  or  any  other  cir 
cumstance  ,  making  it  desirable  to  reduce  its  circulation,  the 
bank  can  so  readily  but  cautiously  put  these  Exchequer  bills  on 
the  market,  as  very  rapidly  to  absorb  a  large  amount  of  depo 
sits  and  circulation.  And  this  is  a  mode  of  reducing  a  circula 
tion,  as  unexceptionable  as  any  that  could  be  adopted.  But  for 
this,  the  bank  could  only  adopt  the  plan  so  frequently  used  in 
this  country,  and  in  England,  too,  when  the  above  remedy 
proves  insufficient  —  that  of  refusing  further  discounts  of  com 
mercial  paper,  whilst  receiving  payment  of  that  which  matures. 
When  the  bank,  for  the  purpose  of  reducing  its  circulation,  or 
of  protecting  its  vaults,  is  obliged  to  withhold  the  usual  facilities 
of  discount  from  men  of  business,  it  withdraws  so  much  of  the 
medium  of  payment  in  daily  use,  as  seriously  to  injure  the  pro 
gress  of  trade ;  to  endanger  the  credit  of  individuals,  if  not 
worse ;  to  enhance  the  rate  of  interest ;  to  reduce  the  price  of 
commodities ;  and  thus  to  impair  mutual  confidence,  and  bring 
on  all  the  other  evils  of  a  severe  pressure.  But  the  Bank  of 
England  can,  to  a  large  extent,  avoid  these  mischiefs  by  with 
drawing  its  circulation,  and  reducing  its  deposits,  by  the  sale 
of  Exchequer  bills.  The  purchasers  of  these  bills  are  not  apply 
ing  for  discounts ;  they  voluntarily  pay  over  to  the  bank  its 
notes,  and  give  up  their  deposits  for  bills,  without  inconvenience 
or  injury  to  any  one ;  and  so  far  the  process  saves  the  commu 
nity  generally  from  any  hurtful  diminution  of  the  currency. 

The  mode  of  transacting  the  daily  business  between  the  Ex 
chequer  and  the  bank  is  by  means  of  Exchequer  bills.  If  the 
Exchequer  has  occasion  for  £5,000,000  for  a  particular  service, 
during  a  certain  quarter  of  the  year,  it  delivers  at  once,  or 
gradually,  to  the  bank  five  thousand  bills  of  £1000  each,  and 


THE  EXCHEQUER  AND  THE  BANK.      591 

receives  a  credit  on  the  books  of  the  bank  to  that  amount,  upon 
which  it  can  draw  at  pleasure.  In  the  mean  time,  the  revenue 
of  the  government,  coming  in  daily,  is  deposited  in  the  bank. 
As  this  deposit  from  such  receipts  accumulates,  the  bank,  day 
by  day,  or  week  by  week,  delivers  to  the  Exchequer  so  many  of 
the  Exchequer  bills  of  £1000  as  will  cover  the  amount  of  the 
growing  deposit.  They  are,  however,  only  retained  as  a  col 
lateral  security,  and  held  until  the  quarterly  day  of  adjustment, 
when  they  are  returned  to  the  bank.  The  Exchequer  then  pays 
off  the  bills  and  the  interest  by  a  check  on  the  bank.  Thus  the 
government,  on  the  security  of  Exchequer  bills,  obtains  the 
facility  and  advantage  of  issuing  Bank  of  England  notes  in  pay 
ment  of  its  various  liabilities,  as  fast  as  they  mature  or  accrue ; 
the  creditors  of  the  government  receive  their  dues  with  prompt 
ness  ;  the  public  has  the  advantage  of  an  increased  volume  of 
currency,  for  which  the  demand  is  so  active  that  there  is  not  the 
slightest  danger  of  its  being  a  superfluous  issue ;  the  bank  has 
the  advantage  of  making  a  large  advance  of  its  credits  and  notes 
upon  the  very  best  security,  and  with  the  least  possible  risk,  in 
other  respects,  as  it  only  enlarges  its  issues  by  an  outgoing  cur 
rent,  to  the  same  extent  it  is  diminished  by  the  incoming  current 
of  the  public  revenue. 

In  all  this  movement  of  the  British  treasury,  which  involves  a 
payment  to  the  public  of  £1,000,000  sterling  each  week,  and  a 
payment  by  the  public  into  the  treasury  of  the  same  sum,  very 
little  or  no  coin  is  required.  The  government  says  to  the  public : 
"  If  you  will  receive  these  notes  of  the  Bank  of  England  in  pay 
ment  of  what  is  due  to  you,  the  Exchequer  will  in  return  receive 
them  in  payment  of  what  is  due  to  the  government." 

At  first  sight,  it  might  appear  that  the  government  could, 
with  equal  success  and  advantage,  issue  its  own  notes  in  pay 
ment  of  debts  and  and  expenditures,  receivable  for  all  taxes  and 
income  payable  into  the  public  treasury.  No  doubt,  if  such 
notes  were  thus  employed,  the  tax-payers  and  debtors  to  the 
government  would  gladly  purchase  them  as  a  means  of  dis 
charging  debt  to  the  public.  But  the  actual  system  has  the  im 
mense  advantage  of  employing  notes  of  the  Bank  of  England, 


592    CONTRAST    WITH    SYSTEM    OF    THE    U.    STATES. 

already  the  chief  currency  of  the  kingdom.  These  notes  are 
always  as  acceptable  and  efficient  as  money,  and  the  public 
creditor  is  neither  compelled  to  sell  the  security  he  receives,  nor 
to  wait  the  demand  of  the  tax-payer.  The  joint  arrrangemont 
between  the  Exchequer  and  the  bank  is,  then,  as  beneficial  to 
the  debtors  and  creditors  of  the  government  as  it  is  effective  and 
convenient  to  the  bank  and  the  Exchequer. 

Our  design,  in  exhibiting  this  feature  of  British  finance,  has 
not  been  to  recommend  or  approve  all  the  details  and  accessories 
by  which  it  is  surrounded.  Many  of  them  are  exceptionable. 
It  is  chiefly  the  feature  of  the  government  advancing  to  the  pub 
lic,  by  its  expenditures,  the  very  medium  in  which  the  public 
revenue  can  afterwards  be  paid,  to  which  we  would  strongly  draw 
the  attention  of  the  reader,  as  worthy  of  prolonged  study  in  all 
its  applications. 

No  other  people  in  the  world,  we  repeat,  have  a  system  of 
finance  which,  in  this  respect,  so  alleviates  the  burden  of  taxa 
tion.  In  the  United  States,  the  public  revenue  is  only  receiva 
ble  in  gold  or  silver.  This  medium  of  payment,  which  is  only 
employed,  in  the  transaction  of  business,  in  the  payment  of  the 
balances  of  foreign  trade,  and  in  the  merest  matters  of  retail,  is 
required  to  be  produced  and  paid  over  for  the  whole  amount  of 
the  gross  revenue  of  the  general  government.  This  aggravates 
the  hardship  of  taxation,  and  increases  the  burden.  By  the 
laws  of  the  United  States,  every  man  is  bound  to  pay  every  debt 
he  owes  in  gold  or  silver ;  yet,  in  operations  above  the  amount 
of  mere  retail,  it  is  almost  unheard  of  that  any  one  is  required, 
in  the  operations  of  industry  or  commerce,  to  pay  a  debt  in  gold 
or  silver.  The  government,  then,  exacts  from  its  debtors  pay 
ment  in  specie,  which  the  people,  who  have  the  same  right  by 
law,  never  exact  as  between  themselves.  If  the  people,  as  be 
tween  themselves,  should  at  any  time  attempt  to  enforce  the 
practice  of  their  government,  a  general  suspension  of  payments, 
public  and  private,  would  ensue.  The  government  enforces, 
therefore,  against  its  debtors  a  mode  of  payment  which  would  be 
disastrous,  beyond  all  estimate,  if  enforced  by  the  people  against 
each  other. 


COIN    AND    PAPER    SYSTEMS    OF    REVENUE.     593 

For  several  years  previous  to  the  year  1858,  the  treasury  of 
the  United  States  contained  an  average  sum  of  $20,000,000  in 
gold  and  silver,  unemployed,  and  of  course  wholly  unproductive. 
That  involved  a  loss  of  §1,500,000  of  interest,  and  reckoning  at 
the  rates  of  interest  prevailing,  more  than  $2,500,000.  By  the 
British  system,  no  gold  or  silver  of  any  considerable  amount 
conies  into  the  public  treasury,  and  of  course  none  lies  there  un 
employed  ;  and  instead  of  heaping  up  money  in  the  public  trea 
sury,  the  British  Exchequer  pays  interest  to  the  bank  and  people 
for  a  temporary  accommodation  of  credit  every  year,  by  which 
it  is  enabled  to  receive  and  disburse  annually  $250,000,000, 
without  employing  the  precious  metals  at  all,  except  for  the 
purposes  of  change. 

The  English  system  withdraws  no  portion  of  coin  or  bullion 
from  their  appropriate  sphere  of  usefulness.  They  may  be  em 
ployed  by  the  banks  as  a  reserve,  as  security  for  their  issues, 
for  the  prompt  redemption  of  notes  and  deposits,  and  to  meet 
the  emergencies  of  an  unfavorable  foreign  exchange  ;  but  in 
none  of  these  cases  do  the  regular  demands  of  the  public  trea 
sury  draw  upon  a  fund  so  important  to  the  steady  progress  of 
trade,  and  a  safe  condition  of  banks  and  money-market.  If  the 
whole  income  of  the  British  treasury  were  receivable  only  in 
gold,  as  in  the  United  States,  it  would  empty  the  Bank  of  Eng 
land  at  the  rate  of  £1,000,000  sterling  every  week,  and  absorb 
its  whole  stock  in  three  months.  It  would  make  it  necessary 
for  the  Bank  of  England  to  keep  in  its  vaults  from  £20,000,000 
to  £40,000,000  sterling,  instead  of  from  £5,000,000  to 
£20,000,000,  as  has  been  done  since  the  resumption  in  1822. 
This  would  take  from  the  channels  of  business  an  average  of 
£10,000,000  sterling  in  the  precious  metals,  to  remain  unem 
ployed,  because  the  treasury,  which  only  receives  and  disburses 
coins,  should  have  an  average  sum  on  hand  of  not  less  than 
twenty  per  cent,  of  the  year's  revenue. 


38 


594  FINANCIAL    SYSTEM    OF    FRANCE. 


22.  Financial  system  of  France — Late  Reforms — Count  Mollien  and 
Marquis  D'Audiffret — The  harmony  and  subordination  of  the  system  — 
Outline  — Relations  of  the  system  with  domestic  exchange  —  Special  func 
tionary  for  distribution  of  public  funds  —  Money  to  remain  in  treasury 
the  shortest  time  possible  —  Economy  of  the  new  system —  Commission  on 
transfers  —  D'Audiffret  quoted  —  Money  always  ready  to  be  advanced  on 
public  account  —  Firmness  of  the  system  —  Necessity  of  it  —  France  first 
appreciates  relations  of  public  finance  ivitJi  trade  and  industry  —  Perils 
of  credit  lessened  by  this  system  —  Want  of  details  —  Contrast  with  the 
system  of  the  United  States. 

The  system  of  public  finance  in  France,  once  so  cumbrous 
and  awkward,  so  expensive  and  otherwise  disadvantageous  to 
the  nation,  has,  during  the  last  half-century,  under  the  able 
direction  of  Count  Mollien,  the  Marquis  D'Audiffret,  and  other 
eminent  men,  undergone  such  radical  changes  as  have  com 
pletely  modified  both  its  principles  and  its  mode  of  operation. 
These  reforms  were  resisted,  in  every  stage  and  with  every 
weapon,  by  the  parties  interested  in  maintaining  old  abuses.  The 
persevering  efforts  of  honest  and  enlightened  men  for  thirty  or 
forty  years  overcame  all  opposition,  and  France  now  enjoys  a 
financial  system,  in  not  a  few  respects,  superior  to  that  of  any 
other  nation. 

The  great  feature  of  the  present  system  in  France  is  the  har 
mony  of  the  whole,  and  the  complete  subordination  of  all  its 
parts  to 'the  central  administration,  or  Ministry  of  Finance,  in 
Paris.  Every  officer  connected  with  the  receipt  and  disburse 
ment  of  the  public  money  is  accountable  to  that  ministry,  and 
every  officer  is  an  officer  of  the  treasury.  The  complications  of 
this  system  of  centralization  are  still  very  great,  and  perhaps 
susceptible  of  being  somewhat  simplified  with  a  further  economy 
in  the  administration.  But  if  the  complexity  is  great,  the  sys 
tem,  order  and  regularity  are  complete  and  admirable.  The 
guards,  securities  and  precautions  against  error,  peculation  and 
fraud,  seem  to  be  perfect ;  the  whole  movement  of  the  public 
money,  from  its  receipt  to  its  disbursement,  is  so  fully  spread 
upon  the  public  accounts,  and  the  checks  provided  are  so  ample, 
that  it  appears  as  if  nothing  more  could  be  effected  in  that 


OUTLINE  OF  THE  FRENCH  TREASURY.    595 

respect.  All  this  is  worthy  of  study ;  but  it  is  not  the  aspect  of 
the  system  to  which  we  now  invite  the  attention  of  the  reader.1 
We  can  only  give  the  merest  outline  of  the  French  treasury, 
before  noticing  that  feature  upon  which  we  desire  to  dwell  for  a 
brief  space.  There  are  receivers-general  in  each  of  the  eighty- 
six  departments,  into  whose  offices  the  public  revenue  of  the 
respective  districts  flows.  These  offices  are  appendages  of  the 
general  treasury,  and  money  paid  into  them  is  in  the  treasury, 
and  can  only  be  paid  or  withdrawn  by  the  regular  processes  of 
the  treasury.  The  great  books  of  the  minister  of  finance  at 
Paris  contain  a  full  exhibit  of  all  the  money  in  the  various 
offices. 

No  money  can  be  disbursed  but  in  the  regular  order  of  pro 
ceeding  :  of  course  none  can  be  paid  but  by  virtue  of,  or  under 
color  of,  some  law ;  none  can  be  paid  without  a  credit  opened 
under  authority  of  the  law  permitting  the  payment ;  no  payment 
can  be  made  under  that  credit,  unless  a  special  order  (mandat) 
is  signed  by  a  proper  officer,  and  addressed  to  the  special  officer 
with  whom  the  credit  is  opened ;  and  finally,  no  payment  can  be 
made,  unless  the  officer  to  whom  the  mandat  is  addressed  finds 
every  previous  step  in  accordance  with  law  and  instructions ; 
and  when  the  disbursing  officers  make  their  return,  it  must  ap 
pear  that  every  formality  has  been  observed,  and  that  the  whole 
proceedings  are  according  to  law,  and  in  due  form,  or  the  credit 
will  not  be  allowed. 

The  whole  proceedings  of  the  officers  of  the  treasury  in  the 
processes  of  payment,  and  their  mode  of  rendering  their  accounts 

1  The  elaborate  work  edited  by  M.  Maurice  Block.,  published  at  Paris  in 
1856,  "  Dictionnaire  de  I'Administration  Franchise,"  in  super-royal  Svo. 
pp.  1630,  contains  ample  details  of  the  forms,  processes  and  laws  pertain 
ing  to  the  financial  system  of  France.  No  other  nation  can  boast  a  work 
upon  internal  administration  to  be  compared  with  this  volume  ;  and  yet 
France  can  boast  another  work,  which,  though  not  so  abounding  in  details, 
is  scarcely  less  important,  and  certainly  more  interesting  to  the  general 
reader,  the  "  Dictionnaire  Politique  :  Encyclopedic  du  language  et  de  la 
Science  Politiques,"  super-royal  Svo.  pp.  944,  Paris,  1848.  This  volume, 
'like  the  other,  is  the  production  of  an  association  of  distinguished  and  com 
petent  men,  selecting  respectively  the  topics  of  their  contributions. 


596      OFFICER    IN    CHARGE     OF    DISTRIBUTION. 

is  subject  to  the  scrutiny  of  a  court  of  accounts,  consisting  of  a 
president  (premier),  three  presidents  (de  chambre),  eighteen 
master  counsellors,  eighteen  consulting  counsellors  of  the  first 
class,  and  sixty-two  of  the  second  class,  and  of  a  procureur-gene- 
ral.  There  is  here  abundant  preparation  for  scrutiny  and  watch 
fulness.  But  although  the  forms  are  complete,  the  system  per 
fect,  the  accountability  strict  and  steadily  enforced,  and  although 
nine-tenths  and  more  of  the  officers  may  be  thus  held  to  strict 
official  honesty,  there  must  still  be  points  of  contact  between  the 
system  and  the  outside  world,  at  which  frauds  may  enter  and 
pass  through  all  the  forms  which  official  care  and  experience 
have  provided  in  the  way  of  prevention.  Extreme  complication 
may,  indeed,  be  the  very  hiding-place  of  peculation ;  and  it  may 
be  more  difficult  to  follow  the  traces  of  a  systematic  robber  of 
the  public,  than  if  he  had  no  such  forms  as  a  cloak  to  villany. 

Our  object  now  is  to  show  that  the  French  treasury,  however 
complicated  its  machinery,  and  however  numerous  its  official 
incumbents,  is  not  without  its  proper  relation  and  sympathies 
with  those  from  whom  it  derives  its  supplies.  It  is  not  divorced 
from  the  business  of  the  people.  Among  its  numerous  officials, 
is  one  in  direct  relations  with  the  chief  minister  of  finance,  who 
has  special  charge  of  the  locality  of  all  money  in  the  treasury. 
He  can  neither  receive  nor  pay  money ;  but  he  can  transfer  the 
public  money  from  one  office  of  the  treasury  to  another,  and 
place  it  wherever  the  exigencies  of  the  government  may  require. 
It  is  in  the-  office  of  this  functionary  that  is  established  a  direct 
and  very  important  connection  with  the  current  business  of  the 
day.  His  duty  requires  of  him  a  careful  and  timely  study  of 
the  points  of  public  expenditure ;  he  must  know  not  only  where 
the  money  will  be  wanted,  but  he  must  have  it  ready  when 
required.  To  accomplish  this  important  object,  it  becomes  his 
duty  to  study  the  domestic  trade  of  the  country,  that  he  may 
avail  himself  of  the  internal  exchanges  in  the  necessary  dis 
tribution  of  the  money  in  the  treasury.  It  is  very  rare,  indeed, 
that  the  French  treasury  ever  shifts  the  locality  of  gold  or  sil 
ver.  It  may  require  many  circuitous  transfers  to  move  the 
excesses  of  revenue,  in  some  departments,  to  the  points  of  ex- 


DOMESTIC    EXCHANGES.  597 

penditure,  and  to  supply  the  deficiency  in  other  departments. 
To  make  these  transfers,  the  officer  who  has  special  charge  of 
that  duty  relies  almost  wholly  on  the  domestic  exchanges.  He 
is  well  informed  where  funds  are  wanted  for  the  purposes  of  in 
dustry  or  trade ;  he  learns  where  and  when  those  who  reside  in 
the  vicinity  of  each  office  of  the  treasury  desire  to  remit  funds ; 
and  he  learns  whence  and  when  they  wish  to  draw  them.  His 
office  becomes  the  depository  of  this  information,  because  he 
intervenes  in  this  business  of  giving  drafts  upon  the  treasury, 
payable  at  other  points,  and  giving  money  at  his  own  office  for 
money  received  at  other  offices.  His  intervention  in  the  trans 
mission  of  funds  assists  in  balancing  the  internal  exchanges  of 
the  country ;  for,  of  course,  the  office  is  only  applied  to  when 
the  business  of  individuals  requires  such  accommodation.  But 
this  business  is  not  confined  to  receiving  money  at  an  office  of 
the  treasury  in  one  place,  and  paying  the  amount  as  may  be 
required  at  another  office,  in  a  different  place ;  that  is,  to  a 
mere  exchange  of  money  between  the  treasury  and  individuals 
at  different  places  ;  it  goes  much  further.  At  times  and  places 
where  large  transfers  of  funds  become  necessary,  the  proper 
officer  of  the  treasury  becomes  the  receiver  of  commercial  or 
individual  paper  to  a  large  amount. 

The  receivers-general  of  the  eighty-six  departments,  and 
their  subordinates,  the  receivers  of  the  treasuries  of  the  arron- 
dissments  and  communes,  maintain  reciprocal  business  relations 
by  frequent  exchanges  of  money,  by  drafts  upon  each  other,  and 
by  bills  upon  Paris  and  other  places.  The  chief  officers  of  the 
treasury  become,  by  the  constant  report  of  this  business  to 
them,  intimately  acquainted  with  the  whole  industrial  and  com 
mercial  movement  of  the  population.  They  regard  it  as  ex 
tremely  important  to  these  interests,  that  the  money  which  is 
necessarily  withdrawn  from  private  uses  for  public  purposes, 
should  be  retained  in  the  treasury  as  short  a  time  as  possible. 
Out  of  300,000,000  or  400,000,000  of  francs  annually  remitted 
from  the  country  treasuries  to  Paris,  not  more  than  ten  per 
cent.,  or  30,000,000  or  40,000,000  of  francs,  are  ever  at  one 
time  in  the  public  treasuries.  This  shows  that  disbursement  fol- 


598     DOMESTIC    EXCHANGES    AND    THE    TREASURY. 

lows  so  rapidly  upon  receipt,  that  the  money  taken  from  the 
people  for  taxes  does  not  remain,  on  the  average,  more  than  a 
month  or  two  out  of  its  proper  channels,  and  that  the  govern 
ment  has  carefully  reduced  the  inconvenience  and  disadvantage 
of  taxation  to  the  lowest  possible  point.  By  this  regular  arid 
constant  communication  with  men  of  capital  and  business,  by 
this  constant  association  with  them  in  the  business  of  transfer 
ring  funds,  the  officers  of  the  treasury  are  able  at  all  times  to 
command,  in  advance  of  the  regular  receipts,  large  sums  of 
money,  which  are  freely  placed  in  the  public  treasury  at  low 
rates  of  interest.  Money  is,  in  fact,  frequently  pressed  upon 
the  various  receivers  by  those  who  desire  short  but  safe  invest 
ments,  and  by  those  who  would  secure,  in  good  season,  the  aid 
of  the  treasury  in  placing  money  at  particular  points.  The  trea 
surers  of  the  departments  do  not  lend  money,  though  they 
receive  it  in  the  way  of  short  loans ;  they  transfer  money  for 
individuals,  and  they  purchase  bills  of  exchange  upon  such 
points  as  the  exigencies  of  the  public  may  require.  Upon  one 
side,  then,  there  are  open  relations  between  the  public  treasuries 
and  the  movements  of  trade,  industry  and  currency ;  that  is, 
upon  the  side  of  the  domestic  exchanges  of  the  country ;  the 
transactions  of  the  treasury,  in  relation  to  the  distribution  of  its 
funds,  are  blended  with  the  movements  of  the  internal  exchanges 
as  conducted  by  the  individuals  concerned  in  it.  This  consti 
tutes  a  very  broad  field  of  contact  between  the  business  of  the 
country,  from  which  the  money  is  withdrawn  by  taxation,  and 
the  public  treasury.  The  public  money  being  retained  for  the 
shortest  possible  time,  is  so  managed,  nevertheless,  as  to  render 
an  important  service  in  aiding  and  regulating  the  internal 
exchanges. 

Taxation  having  reached,  in  France,  a  point  beyond  which  it 
cannot  be  increased  without  passing  the  ability  of  the  people  to 
pay,  an  alleviation  of  the  burden,  like  that  we  have  just  men 
tioned,  is  of  signal  advantage.  According  to  the  former  revenue 
system  of  France,  the  money  remained  for  many  months  in  the 
hands  of  the  receivers,  who  merely  made  advances,  on  interest, 
to  the  government  from  time  to  time,  and  settled  their  accounts 


ECONOMY    OF    THE     FRENCH    SYSTEM.  599 

once  a  year.  Now,  all  money  is  held  to  be  in  the  treasury  from 
the  moment  it  is  received  into  the  office  of  any  department;  and 
it  is  sent  into  the  general  circulation  again  with  as  little  delay 
as  possible.  The  assistance  thus  afforded  to  the  adjustment  of 
the  domestic  exchanges  greatly  promotes  punctuality  in  com 
mercial  and  industrial  payments  and  remittances,  by  diminish 
ing  the  expense  and  the  disturbances  occasioned  by  paying  the 
balances  of  the  internal  trade.  These  features  of  the  present 
financial  system,  by  which  it  is  so  closely  connected  with  the  in 
ternal  trade  and  exchanges,  are  regarded  by  an  eminent  French 
writer  upon  finance  as  rendering  less  necessary  in  France  than 
in  other  countries,  that  development  of  credit  in  banking  which 
is  so  prevalent  and  so  dangerous  elsewhere.1 

The  same  author  informs  us  that,  under  this  system,  the  ex 
penses  of  the  negotiations  or  transfers  of  the  treasury  fell  from 
55,000,000  of  francs  to  2,000,000  or  3,000,000,  upon  the  move 
ment  of  four  to  five  milliards  of  francs ;  and  that  the  credit,  or 
confidence,  upon  which  this  business  proceeds  has  long  been 
upon  such  a  solid  base,  that  it  has  survived  uninjured  many 
political  revolutions  ;  and  that  the  people,  thus  brought  into 
special  relations  with  the  treasury,  have  long  since  perceived 
the  propriety  of  yielding,  in  all  matters  pertaining  to  public 
finance,  to  the  formalities  and  precautions  of  the  treasury. 

No  intermediary  is  permitted  by  the  treasury  in  its  financial 
operations.  All  that  is  done  between  the  officers  of  the  treasury 
and  men  of  business  must  be  done  in  the  forms  and  methods  of 
the  treasury,  which  takes  all  the  power,  and  assumes  all 
the  responsibility.  Not  even  the  Bank  of  France  is  exempt 
from  this  rule.  It  deals  with  the  treasury  only  as  individuals 


1  This  is  a  remark  of  the  Marquis  D'Audiffret,  one  of  the  most  distin 
guished  of  the  French  Ministers  of  Finance — a  minister  to  whom,  with  Count 
Mollien,  the  French  Government  is  chiefly  indebted  for  that  great  financial 
reform,  which,  beginning  half  a  century  ago,  has  converted  the  French 
revenue  system  from  one  of  the  worst  to  one  of  the  best,  if  not  the  very 
best,  in  the  world.  The  Marquis  D'Audiffret  published  in  Paris,  in  1854, 
in  six  volumes  8vo,  "  Systeme  Financier  de  la  France,"  a  work  to  which 
we  confidently  refer  the  reader  as  among  the  best  on  national  finance  which 
has  yet  appeared  in  any  country. 


600    THE    TREASURY    AND    DOMESTIC    EXCHANGE. 

may  do  ;  there  is  no  financial  connection  between  the  bank  and 
the  treasury.  The  treasury  is  enabled  by  law,  through  its  offi 
cers,  to  perform  all  the  acts  necessary  to  its  full  operation,  with 
out  any  dependence  on  the  bank ;  it  would  borrow  from  the 
Bank  of  France  only  as  it  would  from  individuals.  The  treasury 
is  itself  an  institution  having  many  of  the  features  of  a  bank,  of 
which  the  offices  in  the  departments  are  branches.  It  absorbs  a 
large  portion  of  the  business  of  the  domestic  exchange,  because 
the  distribution  of  the  public  funds  is  a  business  of  the  same 
nature ;  to  keep  the  public  exchange,  or  distribution  of  funds, 
wholly  separate  from  the  private,  would  be  an  injury  to  both. 
The  receivers  of  the  departments  are  authorized,  under  the 
direction  of  the  minister  having  special  charge  of  the  distribu 
tion  of  the  public  moneys,  to  deal  in  the  domestic  exchanges  so 
far  as  may  be  needful  to  effect  the  objects  of  the  treasury.  And 
for  this  they  are  allowed  to  charge  a  commission,  when  the  rates 
of  domestic  exchange  admit  of  it  without  expense  to  the  govern 
ment.  It  is  obvious  that  the  effect  must  be  to  facilitate  remit 
tances,  promote  punctuality,  and  lessen  the  rate  of  domestic 
exchange.  The  latter  result  is  so  obvious,  that  it  has  often  been 
the  subject  of  complaint,  that  this  intervention  of  the  treasury  in 
the  domestic  exchange  is  an  injury  to  bankers  who  are  specially 
engaged  in  this  business.  To  this  it  is  replied  that  the  treasury, 
in  doing  this,  is  only  attending  to  its  own  business  in*  the  best 
way,  and  that  all  its  exchange  transactions  in  paper  are  but  a 
branch,  or  a  small  fractiou,  of  its  business.  The  profits  made 
by  the  receivers  are  an  economy  to  the  treasury,  because  it  is 
by  this  mode  of  proceeding  that  the  expense  of  distributing  the 
public  funds  is  reduced  to  its  minimum. 

"  The  receivers-general,  eighty-six  in  number,  arc  the  con 
stant  auxiliaries  of  the  local  officers,  whose  operations  and  acts 
they  aid  by  timely  provision  of  the  ways  and  means  applicable 
to  the  necessities  of  every  day,  and  every  locality.  It  is,  in  fact, 
through  them  that  the  treasury  is  enabled  to  meet  every  exigency, 
by  its  ready  access  to  the  capital  of  men  throughout  the  coun 
try,  who  willingly  commit  their  money  to  the  public  through  the 
hands  of  these  faithful  depositories  of  the  national  funds.  It  is 


THE    TREASURY    AND     CAPITALISTS.  601 

through  the  confidence  they  inspire,  by  their  careful  regard  for 
private  as  well  as  public  interests,  that  the  idea  of  taking  shares 
in  the  great  book  of  the  national  debt  is  becoming  daily  more 
familiar  and  popular.  It  is  upon  the  faith  reposed  in  these  trea 
suries  of  the  departments,  and  upon  the  advances  they  can  always 
command,  so  fully  proportioned  to  the  necessities  of  the  moment, 
that  a  reserve  of  more  than  a  hundred  millions  of  francs  is  con 
stantly  at  the  disposition  of  the  minister  of  finance. 

"  We  may  demand,  then,  what  could  replace,  with  such  secu 
rity  and  economy,  a  treasury  system  so  well  tried,  and  so  much 
approved  in  France ;  so  generally  admired  abroad,  so  favorable 
to  all  interests  :  a  system  which,  subjected  for  more  than  thirty 
years  to  the  perilous  vicissitudes  of  so  many  political  changes, 
has  not  ceased  its  regular  operations  for  a  single  day ;  has  not 
for  one  instant  superseded  the  full  use  or  due  application  of 
the  public  funds ;  has  ».ot  suffered  any  deficit  of  the  money  in 
charge,  nor  any  misapplication  of  resources,  general  or  special ; 
and  has  not  promptly,  in  all  circumstances,  yielded  to  the 
requirements  of  law,  and  to  the  checks  of  that  accountability 
needful  to  public  security."1 

"  The  task  of  a  minister  of  finance  would  be  incomplete,  as  a 
regulator  of  the  movement  of  the  national  wealth,  if  he  could 
not  direct  the  distribution  of  the  public  funds  derived  from  taxa 
tion  and  from  credit ;  funds  which,  from  this  double  source,  are 
pouring  into  the  treasury,  and  from  the  treasury  into  the  chan 
nels  of  a  circulation  of  paper  and  of  coins ;  which  funds  are 
thus  continually  withdrawn  for  a  short  time  from  the  employ 
ments  of  industry  and  trade,  to  be  immediately  restored. 
The  local  equilibrium  of  receipts  and  disbursements  cannot  be 
maintained  properly  and  exclusively  for  the  public  treasury,  if 
at  the  same  time  private  interests,  so  far  as  they  are  concerned 
in  the  matter,  are  not  assured  by  a  wise  and  skilful  manage 
ment  in  the  distribution  of  the  public  funds. 

"  France  is  the  only  nation  which  has  fully  appreciated  the 

1  Systeme  Financier  de  la  France,  par  Le  Marquis  D'Audiffret,  torn.  i. 
p.  353. 


602  DISTRIBUTION    OF    PUBLIC    FUNDS. 

intimate  connection  between  the  operations  of  finance  and  the 
general  movement  of  individual  transactions,  and  which  has  kept 
them  in  perfect  harmony  with  each  other,  without  disturbing  the 
regular  progress  of  either,  by  means  of  a  mechanism  skilfully 
adapted  to  the  administration  of  the  treasury. 

"But  that  this  incessant  disposal  of  the  means  and  daily 
exigencies  of  every  locality  be  not  deranged,  in  the  hand  which 
regulates  it  in  all  parts  of  the  country,  it  is  indispensable  to 
leave  to  his  direct  and  immediate  disposition  the  numerous 
agents  and  functionaries  who  accumulate  the  funds  to  be  distri 
buted,  who  transmit  them  sometimes  from  the  tax-payer  to  the 
public  creditor,  sometimes  from  the  offices  of  the  receivers  into 
the  channels  of  commerce,  in  exchange  for  credits  in  accounts 
current,  or  for  bills  of  exchange  payable  on  time  at  Paris  and 
upon  other  places.  These  conversions  of  specie  into  commercial 
paper  on  time,  these  reciprocal  advances  of  the  agents  of  the 
treasury,  and  their  private  or  unofficial  correspondents,  who 
accept  from  and  render  favors  to  the  public  treasury  according 
to  local  necessities  and  the  wants  of  the  treasury,  maintain  at 
all  points  of  the  country  the  ways  and  means  necessary  to 
balance  the  exchanges,  assure  the  punctual  fulfilment  of  all 
engagements,  and  give  a  firm  basis  not  only  to  private  but  to 
public  credit.  This  beautiful  financial  organization  gives  great 
energy  to  the  action  of  authority,  by  affording  assistance  to  all 
interests,  public  and  private,  and  thus  aids  the  execution  of  its 
orders  even  in  times  of  the  greatest  difficulty. 

"  The  example  of  other  nations  has  amply  taught  us  how  im 
prudent  it  is  to  abandon  a  prerogative  involving  such  influence, 
to  establishments  directed  by  a  special  and,  so  to  speak,  indi 
vidual  interest,  and  which  are  not  attached  by  strict  ties  to  the 
direct  and  universal  impulse  of  government.  This  powerful  con 
sideration  counsels  us,  in  France,  never  to  extend  the  sphere  of 
public  banks  and  institutions  of  credit  beyond  a  certain  limit, 
distinctly  and  practically  traced,  by  the  power  of  the  existing 
circulation.  It  is  enough  that  banks  and  institutions  of  credit 
be  permitted  to  supply  that  deficiency  of  the  circulation  which 
the  present  stock  of  money,  the  existing  currency,  and  the 


SYSTEMS     OF    FRANCE     AND     UNITED     STATES.    603 

operations  of  the  treasury,  with  all  its  subordinate  offices  and 
functionaries,  cannot  furnish."  l 

Though  alleged  as  a  great  fault  in  the  financial  system  of  the 
United  States,  that  it  is  wholly  secluded  from  the  business  of 
the  country ;  that  it  manages  the  whole  transactions  of  the 
public  treasury  without  reference  to  any  direct  benefit  which 
might  be  conferred  upon  the  people  at  large,  or  any  burden 
which  might  be  lessened,  or  any  regulating  power  which  might 
be  beneficially  exerted,  we  are  not  yet  sufficiently  informed  of 
the  details  and  results  of  the  French  system,  in  regard  to  which 
the  Marquis  indulges  so  much  complacency,  to  make  a  fair 
comparison  between  them.  We  have  no  reason  to  question  his 
conclusions ;  but  neither  he  nor  any  other  writer  that  we  have 
met  with, 'furnishes  full  information  in  regard  to  the  practical 
operation  of  that  mode  of  dealing  in  domestic  exchange  carried 
on  so  extensively  by  the  treasury  of  France,  through  its  branches 
in  the  departments.  Until  this  is  known  in  detail,  no  satisfac 
tory  conclusions  can  be  reached,  and  no  reliable  estimate  can  be 
formed  of  the  true  value  of  the  system,  and  especially  of  its 
applicability  elsewhere. 

It  is  clear,  from  this  and  other  passages  in  the  works  of  the 
Marquis  D'Audiifret,  that  the  friends  of  the  present  admirable 
financial  system  of  France  sympathize  with  the  friends  of  the 
Independent  Treasury  of  the  United  States,  in  a  jealousy  of 
banks  of  circulation.  It  is  remarkable,  that  whilst  both  partake 
of  this  feeling,  they  have  taken  opposite  directions  in  their 
practical  measures.  In  France,  the  public  treasury  has  resolved 
itself,  through  its  eighty-six  branches,  into  a  great  institution 
for  the  management,  aid  and  regulation  of  the  domestic  ex 
changes,  having  many  of  the  characteristics  of  a  vast  national 
bank.  In  this  country,  all  connection  with  the  current  business 
has  been  severe,d,  the  treasury  performs  no  function  of  a  bank, 
it  recognises  no  persons  but  those  from  whom  it  receives  money, 
and  to  whom  it  pays  money  —  its  debtors  and  creditors.  What- 

1  Systeme  Financier  de  la  France,  par  Le  Marquis  D'Audiffret,  torn.  i. 
pp.  532-3-4. 


604  THE    COMPARISON    CONTINUED. 

ever  has  been  done  beyond  this  is  against  the  spirit  of  the  sys 
tem,  and  the  letter  of  the  law.  Like  an  individual  who  keeps 
no  bank  account,  our  public  treasury  merely  receives,  keeps  and 
pays  out  its  own  money.  The  people  of  the  United  States 
make  all  their  large  payments  through  banks.  The  treasury 
wholly  discards  them :  the  people  employ  almost  exclusively  a 
paper  currency  —  the  treasury  wholly  discards  it,  and  receives 
only  gold  or  silver.  The  treasury  of  the  United  States  discards 
all  relations  with  banks,  with  paper  currency,  with  industry,  and 
with  trade.  It  is  a  mere  creature  of  income  and  disbursement. 
The  French  treasury  associates  itself,  or  blends  its  processes, 
with  the  general  business  of  the  country,  so  far  as  even  to  sup 
ply,  to  some  extent,  the  place  of  banks  or  institutions  of  credit ; 
the  idea  being  that,  so  far  as  the  treasury  can  afford  the  same 
facilities  in  regard  to  domestic  exchange  which  banks  give,  it 
should  do  so  to  the  exclusion  of  banks ;  that  private  institutions, 
wholly  under  the  guidance  of  private  interests,  cannot  so  fully 
promote  the  general  interests  as  the  action  of  the  treasury,  when 
directed  to  the  same  end. 

The  prevailing  opinion  in  the  United  States  is,  that  neither 
banks,  nor  individuals,  nor  the  officers  of  the  treasury,  can  pro 
perly  be  allowed  any  discretion  where  the  public  funds  are  con 
cerned.  Our  republic  thus  exhibits  less  confidence  in  official 
virtue  than  the  monarchical  government  of  France.  Can  it  be 
that  experience  has  generated  this  distrust  ? 


INDEPENDENT    TREASURY.  605 


§3.  The  Treasury  of  the  United  States  — Act  of  Congress,  184G  —  Paper 
currency  the  usage  of  the  country  —  Departure  from  usage  —  Effect  upon 
the  banks  —  Advance  of  interest  —  Increase  of  private  banks  —  Economy 
of  the  system  — Difficulty  of  execution  —  Tlie  remedy  a  step  towards  bank 
ing  —  Domestic  exchange  and  the  treasury  —  New  York  the  centre  of  the 
operations  of  the  treasury  and  the  domestic  exchanges  —  Transmission  of 
funds  to  and  from  New  York  —  Paper  operations  of  the  treasury  —  The 
present  system  seldom  of  advantage  to  public  creditors  —  Indirect  taxation 
and  California  gold  have  favored  the  Independent  Treasury. 

The  treasury  of  the  United  States  is,  by  law,  established  in 
the  buildings  appropriated  to  that  purpose  in  Washington : 
"and  all  moneys  paid  into  the  same  shall  be  subject  to  the  draft 
of  the  treasurer,  drawn  agreeably  to  appropriations  made  by 
law."  There  are  seven  sub-treasuries,  or  offices,  for  the  safe 
keeping  of  money  out  of  Washington,  respectively  at  Philadel 
phia,  New  York,  Boston,  Charleston,  New  Orleans,  St.  Louis, 
and  San  Francisco.  By  the  act  of  Congress  of  1846,  which 
established  what  has  since  been  called  the  Independent  Trea 
sury,  it  is  provided  "  that  the  treasurer  of  the  United  States, 
the  treasurer  of  the  mint  of  the  United  States,  the  treasurers 
and  those  acting  as  such  of  the  various  branch  mints,  all  col 
lectors  of  the  customs,  all  surveyors  of  the  customs  acting  also 
as  collectors,  all  assistant  treasurers,  all  receivers  of  public 
moneys  at  the  several  land  offices,  all  postmasters,  and  all  public 
officers  of  whatsoever  character,  be  and  they  are  hereby  required 
to  keep  safely,  without  loaning,  using,  depositing  in  banks,  or 
exchanging  for  other  funds  than  as  allowed  by  this  act,  all  the 
public  money  collected  by  them,  or  otherwise  at  any  time  placed 
in  their  possession  or  custody,  till  the  same  is  ordered  by  the 
proper  department  or  officer  of  the  government  to  be  transferred 
or  paid  out :"  "  that  all  collectors  and  receivers  of  public  money, 
of  every  character  and  description,  shall,  so  frequently  as  they 
may  be  directed  by  the  Secretary  of  the  Treasury  or  the  Post 
master-general,  pay  over  to  the  treasurer  of  their  respective  dis 
tricts  all  public  money  collected  by  them  or  in  their  hands ;  and 
it  shall  be  the  duty  of  the  Secretary  and  Postmaster-general 
respectively  to  order  such  payments  by  the  said  collectors  and 


606        CURRENCY  OF  THE  TREASURY. 

receivers  at  all  said  places  at  least  as  often  as  once  in  each 
week,  and  as  much  more  frequently  in  all  cases  as  they  in  their 
discretion  may  think  proper."  It  is  further  enacted  in  the  same 
statute,  "  that,  on  and  after  the  1st  of  January,  1847,  all  sums 
payable  to  the  United  States  shall  be  paid  in  gold  or  silver  coin, 
or  in  treasury-notes  issued  under  the  authority  of  the  United 
States:  "that,  on  and  after  the  1st  of  April,  1847,  all  payments 
shall  be  made  in  gold  or  silver  coin,  or  in  treasury-notes,  if  the 
creditor  agree  to  receive  said  notes  in  payment:"  "  that  no  ex 
change  of  funds  shall  be  made  by  any  disbursing  officer  or 
agents  of  the  government,  of  any  grade  or  denomination  what 
ever,  other  than  an  exchange  for  gold  or  silver ;  and  every  such 
disbursing  officer,  when  the  means  for  his  disbursements  are  fur 
nished  to  him  in  gold  and  silver,  shall  make  his  payments  in  the 
money  so  furnished ;  or,  when  those  means  shall  be  furnished  to 
him  in  drafts,  shall  cause  those  drafts  to  be  presented  at  their 
place  of  payment,  and  properly  paid  according  to  the  law,  and 
shall  make  his  payments  in  the  money  so  received  for  the  drafts, 
unless  in  either  case  he  can  exchange  the  means  in  his  hands  for 
gold  and  silver  at  par." 

The  Secretary  of  the  Treasury  is  required,  by  the  same  act, 
to  issue  regulations  to  enforce  the  speedy  presentation  of  govern 
ment  drafts  for  payment  at  the  place  where  payable,  and  to  pre 
scribe  the  time  within  which,  according  to  distance  from  Wash 
ington,  all  drafts  upon  the  holders  of  public  moneys  shall  be  pre 
sented  for  payment :  and  these  regulations  so  to  be  enforced  are 
specially  intended  "to  guard,  as  far  as  may  be,  against  those 
drafts  being  used  or  thrown  into  circulation  as  a  paper  currency, 
or  medium  of  exchange."  ] 

The  financial  system  established  by  this  act  of  Congress  is 
that  which  still  governs  the  Treasury.  Its  main  object  was 
to  restrict  the  receipts  into  the  treasury  and  its  payments  to 
gold  and  silver  coins.  The  very  important  privilege  of  paying 
in  treasury-notes  has  had  no  practical  effect :  we  shall  refer  to 
it,  however,  before  we  close  the  chapter.  The  result  of  this  act 

1  Act  of  Congress,  August  5th,  184G. 


THE    USE    OF    PAPER    CURRENCY.  607 

was  to  introduce  a  new  and  severe  feature  into  public  business. 
The  usage  of  the  people  in  this  country  has  been  to  make  all 
large  payments  in  paper  currency,  or  by  the  agency  of  banks. 
This  usage  has  grown  in  strength,  and  spread  more  widely  year 
by  year,  until  it  may  be  said  that,  for  the  last  forty  years,  not 
one  per  cent,  of  the  transactions  of  trade  and  industry  within 
our  borders  have  been  effected  by  the  medium  of  gold  or  silver 
coins.  Although  this  usage  has  been  the  object  of  severe  and 
continued  attacks  from  a  host  of  editors  and  authors,  and 
although  the  people  have  had  often  before  them  the  most  lament 
able  specimens  of  the  manner  in  which  a  paper  currency  may 
be  abused,  and  of  the  sad  effects  of  such  abuses,  they  continue 
to  multiply  banks,  and  to  employ  them  as  the  chief  agents  in 
effecting  the  payments  accruing  upon  the  annual  domestic  trans 
actions  of  the  country.  In  1830,  there  were  330  banks  in  the 
United  States  ;  now  there  are  over  1400.  This  is  unanswerable 
evidence  of  the  usage  of  the  country  —  a  usage  which  grows  in 
fche  face  of  the  constitutional  provision,  that  every  individual  has  a 
right,  of  which  neither  Congress  nor  the  Legislature  of  any  State 
can  deprive  him,  to  exact  payment  of  what  is  due  to  him  in  gold  or 
silver.  Every  man  in  the  country  may,  at  his  pleasure,  elect  to 
do  so,  and  no  penalty  can  befall  him,  except  what  his  fellow- 
citizens  may  inflict  upon  him  by  refusing  to  have  dealings  with 
one  who  thus  departs  from  the  customary  modes  of  doing  busi 
ness.  The  government  of  the  United  States  has,  however,  so 
administered  the  act  of  August,  1846,  as  to  do  what  no  man 
of  large  business  has  ever  done  in  this  country  —  it  has  broken 
through  the  usage  of  the  people,  and  has  for  ten  years  refused 
to  receive  any  thing  but  gold  or  silver  coins  into  the  public  trea 
sury.  It  has  thus  divorced  itself  in  finance  from  the  popular 
mode  of  effecting  payments.  The  whole  payments  of  the  country, 
industrial  and  commercial,  made  through  the  banks,  and  by 
means  of  individual  paper,  exceed  those  of  the  treasury  not  less 
than  a  thousand-fold ;  and  yet  they  are  successfully  accom 
plished  by  means  which  the  national  treasury  disowns  and 
rejects. 

It  is  a  striking  feature  of  this  measure,  that  whilst  it  is  emi- 


608   THE  TREASURY  DEPARTS  FROM  USAGE. 

nently  anti-popular  in  its  character,  public  payments  being 
exacted  in  a  mode  which  would  not  be  tolerated  in  the  walks  of 
business,  yet  the  government  is  not  only  sustained  in  a  financial 
policy  without  parallel  in  the  circumstances,  but  the  measure  is 
regarded  with  much  complacency,  and  deemed  by  many  a  public 
benefit.  The  fact  is,  that  this  exclusive  and  severe  policy  which 
maintains  a  gold  and  silver  currency  for  the  government,  whilst 
the  people  content  themselves  with  one  of  paper  or  credit,  is 
apparently  successful.  Its  evil  consequences,  if  great,  are  not 
visible ;  they  are  like  that  taxation  which  is  imposed  upon  foreign 
products,  not  perceived  nor  directly  felt  by  the  consumer  or  suf 
ferer.  In  many  countries  it  might  have  produced  an  explosion 
which  would  have  blown  up  the  system.  The  people  here,  how 
ever,  readily  abandon  to  the  government  the  hard  currency  they 
decline  employing  themselves.  The  experiment  has  shown  that 
the  government  can  pursue  this  financial  policy,  and  collect  its 
whole  revenue  in  the  precious  metals,  without  direct  or  apparent 
evil  results.  It  has  turned  out  to  be,  on  the  surface,  rather  a 
question  between  the  government  and  the  banks,  than  between 
the  people  and  the  government. 

In  the  United  States,  the  banks  are  the  only  large  holders 
of  gold  and  silver  coin.  Being  a  costly  commodity  to  keep, 
they  limit  the  sum  retained  to  an  amount  as  low,  or  lower  than 
is  consistent  with  their  safety.  Their  circulation  and  deposits 
being  payable  on  demand,  they  restrict  the  amount  to  a  sum 
sufficient  to  meet  the  probable  demand.  This  adjustment,  de 
pending  so  much  upon  contingencies  and  conjecture,  is  one  which 
is  watched  with  great  care  and  anxiety  by  the  banks.  It  is,  of 
course,  a  very  sensitive  line  which  the  banks  fix  as  the  boundary 
of  probable  demand  ;  it  is  easily  disturbed,  and  apprehension 
sometimes  shakes  it  as  much  as  actual  invasion.  The  banks 
being  the  only  depositories  of  specie,  being  under  the  necessity 
of  paying  it  when  required,  and  without  the  privilege  of  asking 
a  premium  according  to  the  intensity  of  the  demand,  become  the 
source  from  which  all  the  coins  needed  for  payment  into  the 
treasury  are  obtained.  But  for  this  position  of  the  banks,  the 
revenue  of  the  United  States  could  not  be  collected  without  coins 


THE    BANKS    BETWEEN    1847    AND    1857.          609 

going  to  a  high  premium.  Dealers  in  the  precious  metals  -would 
doubtless,  in  such  case,  purchase  and  hold  coins  for  those  who 
required  them  for  payment  to  the  government,  but  not  without 
a  full  profit  on  their  business.  The  actual  result  has  been  that, 
since  1847,  the  treasury  of  the  United  States  has  absorbed  from 
31,000,000  to  $1,500,000  of  coin  weekly,  nearly  the  whole  of 
which  has  been  derived  from  or  through  the  banks.  As,  during 
the  greater  part  of  the  time  since  1847,  the  gold  of  California 
has  been  flowing  into  the  country  in  a  stream  nearly  equal  to 
the  public  revenue,  the  banks  have  not  suffered  from  this  ab 
sorption  of  specie  by  the  treasury  so  much  as  they  might  other 
wise  have  done.  They  have,  however,  been  continually  reminded 
of  the  depleting  power  which  the  treasury  held  over  them.  The 
effect  has  been  that,  between  the  occasional  large  demands  for 
specie  to  ship  to  Europe  and  the  more  constant  but  not  regular 
demand  for  the  treasury,  the  banks  have  been  kept  for  the  last 
ten  years  in  a  state  of  feverish  excitement  very  unfavorable  to  a 
steady  policy  and  the  true  interests  of  trade.  The  great  activity 
of  foreign  commerce,  and  the  vast  movements  of  domestic  indus 
try  and  trade,  seemed  to  demand  and  warrant  a  considerable 
expansion  of  credit  and  bank  accommodation ;  when  this  began 
gradually  to  be  conceded,  the  banks  were,  at  short  periods, 
checked  by  the  outward  current  of  specie  to  Europe,  and  the 
inward  flow  to  the  treasury.  These  checks,  although  felt  by  the 
banks,  could  not  always  be  immediately  understood.  The  blow 
might  fall  upon  one  or  two  banks  only  at  a  time,  and  through 
them  upon  others ;  the  uncertainty  as  to  the  quarter  from  which 
demand  came  was  accompanied  by  equal  doubt  as  to  its  extent 
or  continuance.  These  checks  almost  always,  induced  some  con 
traction  of  currency,  or  some  hesitation  in  their  discounts  on  the 
part  of  the  banks ;  and  this  has  led  to  one  of  the  most  striking 
results  of  our  present  treasury  system.  Banks  may  prudently 
hesitate ;  they  may  deem  it  necessary  to  contract  their  issues ; 
but  their  customers  cannot  do  this :  their  liabilities  continue  to 
mature,  and  must  be  met ;  and  when  the  banks  decline  or  hesi 
tate,  the  needful  facilities  must  be  found  elsewhere.  A  high  rate 
of  interest  became  the  inevitable  result;  the  rate  of  interest 
39 


610  ADVANCE    OF    INTEREST. 

being  determined,  as  we  have  explained,  not  by  the  abundance 
or  scarcity  of  coins  or  specie,  but  by  the  demand  and  supply  of 
those  funds  usually  employed  in  paying  debts.  The  banks  being 
kept,  by  the  general  activity  of  trade,  in  a  state  of  considerable 
expansion,  and  by  the  double  demand  for  specie  in  a  constant 
state  of  trepidation,  often  failed  to  meet  the  just  expectations  of 
their  customers  ;  and  a  demand  for  the  means  of  payment  sprung 
up  in  our  chief  cities,  outside  of  the  banks,  which  finally  induced 
a  large  class  of  capitalists  to  enter  into  the  business  of  discount 
ing  notes.  There  are,  probably,  now  in  the  United  States  a 
score  of  private  bankers  for  every  one  there  was  in  1847.  But 
there  were,  probably,  an  hundred  persons  employing  their  means 
in  discounting  private  securities  in  1857,  for  one  in  1847.  The 
high  rate  of  interest  which  had  prevailed  for  so  many  years, 
proved  a  powerful  temptation  to  capitalists ;  and  the  amount 
attracted  to  this  business  was,  in  many  places,  estimated  to  ex 
ceed  many  times  the  capital  of  the  bunks.  This  is  believed  to 
have  been  the  case  in  Philadelphia.  In  New  York,  and  other 
cities,  it  is  known  to  have  been  very  great.  What  the  effect  has 
been,  of  this  large  diversion  of  capital  from  its  former  applica 
tions,  it  is  impossible  to  describe  ;  but  it  must  have  been,  and  is 
now,  disastrous.  But  with  all  this,  the  rate  of  interest  con 
tinued  high  until  the  crash  came,  until  importations  fell  off,  and 
until  the  banks  were  wholly  relieved  from  the  foreign  demand 
for  specie,  and  the  amount  going  into  the  treasury  fell  off 
one-half. 

It  is  possible  there  may  have  been  some  advantage  to  the 
country  in  all  this  financial  disturbance  and  complication.  We 
cannot  conjecture  to  what  a  state  of  expansion  the  banks  would 
have  gone,  if  they  had  not  thus  been  held  in  check ;  it  would  be 
still  more  difficult  to  conjecture  whether  the  evils  of  the  crisis 
and  the  revulsion  would  have  been  more  or  less,  if  they  had  fol 
lowed  upon  a  greater  expansion  of  the  banks,  or  upon  the  mere 
extension  of  individual  credit,  as  was  the  case  in  this  instance. 
However  that  may  be,  the  actual  progress  of  this  great  financial 
movement  has  been  to  transfer  from  the  pockets  of  the  men  of 
industry  and  trade  in  this  country  to  the  money-lenders,  from 


THE    GOVERNMENT    CURRENCY.  611 

$50,000,000  to  $100,000,000  more  than  the  amount  of  interest 
which  they  would  otherwise  have  paid.  We  regard  this  as  a 
regular  business  transaction ;  and  large  as  the  sum  which  was 
thus  levied  upon  industry  and  trade  by  men  of  capital,  it  was  in 
the  regular  course  of  business ;  it  might  have  proved  far  worse 
for  those  interested,  if  they  could  not  have  obtained  this  succor, 
heavily  as  they  have  paid  for  it.  The  solution  of  the  difficulty 
lies  in  the  inquiry,  what  caused  and  sustained  this  high  rate  of 
interest  ? 

We  are  far  from  thinking  that  other  causes  have  not  inter 
vened  in  this  prolonged  high  rate  of  interest ;  but  we  are  confi 
dent  that  the  one  we  propound  has  been  by  far  the  most  potent. 
The  disturbances  in  our  money-market,  and  the  mysterious  con 
duct  of  the  banks,  have  been,  during  the  last  ten  years,  more 
than  ever,  subjects  of  wonder  and  speculation.  Whoever  reflects 
that,  during  this  time,  the  banks  were  under  the  operation  of  a 
great  double-action  engine,  which  drew  one  stream  of  specie  to 
the  public  treasury,  and  ejected  another  into  Europe,  will  cease 
to  wonder  at  the  unsteady  policy  they  pursued. 

Much  has  been  said,  and  much  more  mi^ht  be  said,  about  the 
economy  of  maintaining  an  exclusive  currency  of  coin  for  the 
treasury  of  the  United  States.  If  the  reasons  in  its  favor  were 
sufficiently  strong,  perhaps  this  consideration  would  be  of  little 
consequence  to  a  national  treasury.  But  these  reasons  may  be, 
and  are  likely  to  be,  the  subject  of  question,  so  long  as  the 
people  at  large  —  every  individual  being  entitled  by  law  to  the 
privilege  of  paying  and  receiving  coin  in  all  his  dealings  —  shall 
choose,  as  they  now  do,  to  employ  paper  currency  and  the  facili 
ties  of  banking  in  preference.  So  long  as  this  is  the  case,  the 
cost  of  a  currency  of  coin  for  the  government  will  be  regarded 
by  many  as  a  needless  burden,  and  a  want  of  economy  without 
excuse.  It  will  continue  to  be  said,  that  what  is  good  enough 
for  the  people  is  good  enough  for  the  government.  The  people 
are  certainly  free  in  their  choice  of  a  currency  for  themselves, 
and,  therefore,  that  choice  is  the  expression  of  actual  public 
.  opinion.  The  real  cost  of  keeping  up  this  system  as  now  ad 
ministered  would  be  estimated  differently,  according  to  the  dif- 


612  TREASURY    DIFFICULTIES. 

ferent  modes  of  viewing  the  subject.  Whatever  the  conclusions 
formed  as  to  the  actual  cost,  whether  $500,000  or  $2,000,000, 
the  sum  .  is  too  considerable  to  be  beneath  notice  in  itself, 
although  insignificant  in  comparison  of  the  indirect  loss  and 
injury  to  the  industrial  interests  of  the  country. 

The  difficulty  of  carrying  out  strictly  this  plan  of  an  exclu 
sive  metallic  currency  in  all  financial  transactions  of  the  govern 
ment,  was  found  from  the  first  to  be  very  great.  It  involved  a 
vast  and  complicated  distribution  of  coin  from  points  where  the 
revenue  was  chiefly  received  to  the  places  of  disbursement.  To 
remove  such  masses  of  coin,  imposed  great  expense  and  great 
risk.  Disbursing  officers  coifld  not  be  all  supplied  with  places 
of  safe  deposit ;  and  their  embarrassments  increased,  until  it 
became  necessary  to  find  a  remedy,  which  was  provided  by 
allowing  them  to  deposit  their  funds  in  the  most  convenient 
office  of  the  treasury,  and,  upon  the  accounts  thus  opened,  to 
draw  in  any  amounts  to  suit  the  progress  of  their  disbursement. 
The  checks  thus  drawn  were  not  only  a  convenience  to  the  pay 
master,  but  to  the  receiver,  whether  they  went  immediately  into 
the  hands  of  the  public  creditor,  or  whether  they  were  received 
by  some  other  person  whom  it  suited  to  advance  the  specie  for 
them.  In  either  case,  it  was  a  step  towards  the  usual  mode  of 
doing  business.  The  office  of  the  treasury,  thus  employed,  be 
came  so  far  a  bank,  that  it  received  public  deposits  and  paid 
them  out  upon  the  check  of  the  depositor.  Whether  these  checks 
circulated  or  passed  through  several  hands  before  payment,  we 
are  not  informed ;  but  it  is  quite  probable. 

It  was  soon  perceived,  under  the  operation  of  the  act  of  1847, 
that  some  further  relaxation  of  its  provisions  was  indispensable 
to  effect  the  necessary  distribution  of  the  public  funds.  It  was 
found  that  the  transmission  of  coins  by  special  messenger,  or 
by  private  express,  was  not  only  very  hazardous,  but  expensive, 
and  that  it  required  much  time.  It  was  natural  to  look  to  the 
domestic  exchanges  of  the  country  for  a  remedy  ;  but  many  ob 
stacles  rose  in  the  way  of  transactions  between  the  treasury, 
which  received  only  coins,  and  the  men  of  business,  who  only 
paid  in  paper.  The  treasury  could  only,  at  best,  avail  itself  of 


THE    TREASURY    AND    DOMESTIC    EXCHANGES.     618 

occasions  when  there  were  balances  to  pay,  and  specie  was  to  be 
remitted.  It  could  only  offer  to  receive  specie  in  one  place,  and 
pay  it  in  another.  But,  in  the  processes  of  domestic  ex 
change,  specie  is  rarely  remitted,  even  when  for  a  time  there 
may  be  a  balance  between  one  locality  and  another,  the  opera 
tors  keeping  their  accounts  for  another  turn  of  the  balance. 
The  balance  between  the  cities  of  New  York  and  Philadelphia 
might  change  sides  every  month  in  the  year,  without  any 
transmission  of  specie,  and  so  between  more  remote  points. 
Every  day  immense  sums  may  be  remitted  between  such  places, 
at  little  or  no  expense,  or  with  a  premium  to  one  side ;  yet  the 
public  treasury,  under  the  present  system,  can  only  avail  itself 
of  domestic  exchange  to  a  very  limited  extent.  The  sums  remit 
ted  are  so  vast  in  the  aggregate,  that  even  the  large  transac 
tions  of  the  government  could  be  carried  without  being  felt ;  and 
though  the  intervention  of  the  treasury  might  be  an  advantage 
both  to  it  and  the  public,  no  such  step,  by  the  terms  of  the  law, 
can  be  taken. 

Aparf  from  some  irregularities,  which,  by  the  novelty  and 
perplexity  of  their  position  in  conducting  a  business  so  foreign 
to  the  customs  of  the  country,  seemed  to  be  forced  upon  the  offi 
cers  of  the  treasury,  and  which  have  been  discontinued  for  seve 
ral  years,  the  processes  of  the  distribution  of  the  public  money 
seem  now  to  have  found  the  best  channels  of  which  the  system 
admits.  Although  it  does  not  permit  that  broad  and  full  con 
tact  with  the  domestic  exchanges  of  the  country,  and  make 
available  all  its  facilities,  as  is  the  boast  of  the  system  of  France ; 
nor  enjoy  the  aid  of  a  great'  bank  like  the  English  Exchequer, 
which  can  pay  any  sum  in  Great  Britain  by  checks  on  the  Bank 
of  England,  or  in  its  notes,  with  as  good  effect  as  it  could  pay 
in  gold ;  yet  for  some  years  large  sums  have  been  moved,  not 
only  without  expense,  but  with  a  profit.  The  profit,  however,  is 
probably  due  to  remittances  to  California,  as  at  San  Francisco 
the  Assistant  Treasurer  has  been  able  to  sell  drafts  of  the 
government  on  New  York  at  two  and  a  half  per  cent,  premium.1 

1  We  give  here,  in  connection,  extracts  from  Reports  of  various  Secre 
taries  of  the  Treasury,  and  Treasurers  of  the  United  States,  containing 


614  MR.  MEREDITH'S  REPORT   OF   is 49. 

The  treasury  of  the  United  States,  therefore,  now  looks  be 
yond  its  circumscribed  duty  of  receiving  coin  and  paying  coin ; 
it  notices  the  fact,  that  New  York  is  not  only  the  point  of  its 

remarks  upon  the  condition  and  progress  of  the  Independent  Treasury  sys 
tem.  It  would  be  very  interesting  to  have  from  the  Treasurer  of  the  United 
States  a  detailed  report  of  every  movement  of  public  funds,  whence  and  whi 
ther,  with  the  expense  and  profit  of  each  operation,  and  how  it  was  effected. 

"Experience  has  demonstrated  some  of  the  requirements  of  the  act  to  be 
productive  of  great  inconvenience,  if,  indeed,  there  be  not  some  which, 
under  the  influence  of  strong  necessity,  are  often  violated.  Disbursing  offi 
cers,  to  whom  drafts  for  large  sums  are  issued,  are,  by  existing  arrange 
ments,  obliged  to  receive  the  full  amounts  of  said  drafts  at  one  payment 
from  the  proper  assistant  treasurer,  while  their  expenditures  must  be  made 
in  small  sums  from  time  to  time.  The  custody  of  the  money  is  thus  forced 
upon  them,  without  any  provision  for  its  convenience,  or  even  safety.  If 
the  money  is  to  be  disbursed  at  points  distant  from  the  place  where  it  is 
received,  the  burden  of  transferring  it  is,  in  like  manner,  imposed  on  them. 
If  they  adopt  the  usual  and  customary  mode  of  keeping  and  transferring 
money,  they  violate  the  law.  If  they  undertake  themselves  its  custody  and 
carriage,  they  incur  great  risk  and  responsibility.  The  actual  carriage  of 
coin  from  place  to-  place  in  the  same  town  is  burdensome,  especially  in  those 
Southern  ports  where  silver  is  the  coin  chiefly  in  use. 

"  To  alleviate  some  of  the  inconveniences  attending  the  system,  if  con 
tinued,  I  would  suggest  — 

"  First.  That  any  person  having  a  draft  on  an  assistant  treasurer  be  per 
mitted  to  deposit  his  draft  with  the  assistant  treasurer,  and  draw  for  the 
amount,  from  time  to  time,  in  such  sums  as  he  may  desire,  upon  his  own 
orders,  payable  to  any  person  or  persons ;  provided  that  the  whole  amount 
of  the  draft  should  be  actually  drawn  within  a  short  period,  say  two  weeks 
after  the  deposit  of  the  draft. 

"  Second.  That  any  disbursing  officer  having  a  draft  on  an  assistant  trea 
surer,  be  permitted  to  deposit  such  draft,*  and  draw  for  the  amount  in  like 
manner:  provided  that  each  order  should  be  presented  for  payment  within 
two  weeks  after  its  date.  These  provisions  would,  it  is  believed,  effectually 
prevent  the  checks  or  orders  being  used  as  currency. 

"The  inconvenience  arising  from  the-  accumulation  of  coin  at  points 
where  it  is  not  required  for  the  public  service,  is  very  great ,-  but  it  seem  a 
to  be  inseparable  from  the  system  itself.  To  pay  a  public  creditor  with  a 
draft  on  a  remote  office,  which  he  cannot  sell  but  at  a  discount,  or  collect 
in  person  without  a  journey,  would  be  unseemly  ;  and  the  government  has 
no  means  itself  of  making  transfers,  in  such  cases,  other  than  the  despatch 
of  special  messengers,  at  some  expense,  and  much  risk  of  loss." — Mr.  Mere 
dith's  Report,  December  3d,  1849. 


MR.  GUTIIRIE'S   REPORT   OF   is 53.  615 

largest  receipts,  but  the  financial  centre  of  its  operations,  and 
the  actual  centre  of  the  internal  exchanges  of  the  whole  country. 
Funds  flow  from  every  State,  and  every  district,  to  that  city, 

— 9 

"  The  disbursing  agents  of  the  several  departments  of  the  government 
being  without  safe  places  of  deposit  for  the  public  money  entrusted  to  them, 
it  was  deemed  right,  and  within  the  provisions  and  spirit  of  the  law,  to 
require  the  treasurer,  and  the  assistant  treasurers,  and  depositories  designed 
by  law,  to  receive  deposits  from  the  disbursing  agents  of  the  government, 
and  to  pay  out  the  same  on  their  checks.  A  regulation  to  that  effect  was 
issued,  and  is  in  operation,  and  accompanies  this  report.  It  is  a  great  con 
venience  to  disbursing  agents,  and  also  secures  the  safety  of  the  public 
money.  The  privilege  of  so  depositing  has  not,  as  yet,  been  embraced  by 
all  the  disbursing  agents  ;  and  it  has  been  suggested  that  some  of  them 
deposit  with  bank  brokers,  under  an  erroneous  idea  that  the  act  does  not 
apply  to  them.  It  is  believed  that  such  deposits  are  in  contravention  of 
the  law."  —  J/r.  Guthrie's  Report,  December  Gth,  1853,  page  14. 

"The  treasury  receives  money  directly  at  its  counter,  and  indirectly  by 
its  assistant  treasurers  and  designated  depositories  at  other  points,  and  dis 
burses  through  the  same  channels.  It  also  issues  drafts  on  the  receiving 
officers  of  the  treasury,  not  designated  as  depositories  for  the  public  money 
in  their  hands  ;  and  when  paid,  treats  the  amount  of  the  transaction  as  at 
once  a  payment  into  and  out  of  the  treasury  by  the  officers  in  question. 
When  the  disbursements  of  those  officers  are  greater  than  their  receipts,  the 
government  is  saved  the  risk  and  expense  of  transporting  the  money  to  a 
depository,  and  the  officer  relieved  from  the  risk  of  keeping  it.  .  .  . 

"  Prior  to  the  4th  of  March  last,  as  I  am  informed,  moneys  were 
advanced  in  large  sums  to  persons  not  officers  of  the  government,  for  the 
ostensible  purpose  of  purchasing  United  States  stock,  for  paying  interest  on 
the  public  debt  and  coupons,  and  for  other  purposes  of  similar  character. 

"In  like  manner,  the  practice  of  issuing  transfer  drafts  in  favor 
of  banks  or  brokers,  to  remain  a  considerable  time  on  the  books  as  an 
equivalent  for  the  expenses  of  transportation,  and  occasionally  renewed,  in 
stead  of  being  paid  at  maturity,  has  entirely  ceased.  Instead  thereof,  in  all 
cases,  the  transfer  draft  has  issued  only  after  the  deposit  of  coin  has  actu 
ally  been  made,  or  when  it  was  necessary  to  transport  the  specie,  and  then 
the  money  has  been  deposited  at  the  desired  point,  as  soon  as  the  transport 
ation  could  be  effected,  by  an  officer  of  the  department."  —  Report  of  Mr. 
Casey,  Treasurer  of  the  United  Stales,  to  Mr.  Guthrie,  November  29/A,  1853, 
page  155. 

"The  Independent  Treasury  act  still  continues  eminently  successful  in 
all  its  operations.  The  transfers  for  disbursement  during  the  fiscal  year, 
to  the  amount  of  $39,407,674  03,  have  been  made  at  a  cost  of  $19,762  35, 
whilst  the  premium  on  the  sale  of  the  treasury  drafts  has  amounted  to 


616        THE  TREASURER'S  REPORT  OF  is 55. 

not  only  to  meet  debts  payable  there,  but  for  distribution 
thence  to  other  places,  and  for  all  sorts  of  financial  movements. 
Money  in  New  York  is  so  readily  available  at  other  points,  that 

$30,431  87.  The  receipts  and  expenditures  during  the  fiscal  year,  amount 
ing  to  $131,413,859  59,  have  all  been  in  the  constitutional  currency  of  gold 
and  silver,  without  any  perceptible  effects  upon  the  currency,  or  on  the 
healthy  business  operations  of  the  country."— Mr.  GutJirie's  Report,  Decem 
ber  3(7,  1855,  page  21. 

"  For  facility  and  convenience  of  disbursements,  and  for  greater  security 
of  the  public  money,  you  have  caused  to  be  issued,  within  the  year,  1590 
transfer  drafts,  in  amount  $41,319,054  18;  and  the  transfers  have  been 
conducted  and  executed  with  commendable  despatch,  and  satisfactory 
result. 

"  The  operations  of  the  money  branch  of  this  office  continue  to  give  great 
satisfaction,  not  to  myself  only,  but  to  disbursing  officers,  government 
creditors,  and  to  every  class  of  persons  having  business  to  transact  with  it, 
especially  the  operations  arising  under  the  business  extension  of  it,  which 
you  directed  should  go  into  effect  on  July  1st,  1853  (carrying  out,  in  spirit 
jind  in  fact,  the  Independent  Treasury  act  of  184G) ;  since  which  they  have 
gradually  increased  to  important  magnitude,  as  will  be  seen  by  the  follow 
ing  statement.  The  amount  of  coin  received  and  paid  during  a  year,  end 
ing  the  30th  of  September,  1855,  averaged,  in  and  out,  $1,261,792  66  per 
month. 

"  Treasury  drafts  paid,  or  passed  to  the  credit  of  disbursing  officers,  num 
ber  1423. 

"  The  accounts  now  kept  with  the  disbursing  officers  are  57  ;  and  their 
checks  paid  and  passed  to  the  debit  of  their  respective  accounts,  number 
17,394,  and  amount  to  $7,093,208  85. 

"  The  arrangement  you  were  pleased  to  direct  as  a  facility  to  the  receipt 
of  coin  here  in  exchange  for  drafts  on  New  York,  without  expense  for  trans 
portation,  by  causing  the  issue  of  regular  transfer  drafts  for  $200,000  at  a 
time  in  my  favor,  and  the  deposit  thereof  with  the  assistant  treasurer  of 
New  York,  subject  to  my  check  on  '  transfer  account/  as  required,  com 
menced  on  January  30th  last,  and  has  been  highly  appreciated  by  persons 
who  desire  to  make  such  exchanges.  Under  it  there  has  been  received,  in 
eight  months,  to  the  30th  of  September  last,  $2,840,237  01 ;  the  money  for 
which  each  check  was  drawn  having  been  paid,  as  required,  into  the  trea 
sury  here  before  the  check  was  drawn."  —  Report  of  Mr.  Casey,  Treasurer 
of  the  United  States,  to  Mr.  Guthrie,  November  22d,  1855,  page  172. 

"The  Independent  Treasury  act  has  been  carried  into  effect,  the  past 
year,  as  far  as  it  has  been  practicable  for  the  department  to  enforce  it. 
Most  of  the  disbursing  officers  of  the  government,  where  conveniently  situ 
ated,  have  and  continue  to  avail  themselves  of  the  convenience  and  security 


MR.  GUTHRIE'S  REPORT   OF   is 56.  617 

it  is  kept  there  to  be  ready  for  use  everywhere  else.  The  trea 
sury  finds  it  easy  to  make  its  payments  elsewhere,  so  long  as  it 
has  funds  in  New  York ;  the  disbursing  officers  find  persons  in 

of  depositing  in  the  vault  of  the  treasurer,  assistant  treasurers,  and  public 
depositaries,  as  will  be  seen  by  statement  No.  89  of  this  report.  Those  who 
have  not  deposited  in  the  vaults  of  the  government,  although  convenient, 
construe  the  act  of  1846  as  allowing  the  officer  a  discretion  on  the  subject. 
This  they  sometimes  exercise,  by  making  what  they  term  special  deposits 
with  chartered  and  unchartered  banks.  The  security  of  the  public  money, 
and  the  prevention  of  its  application  to  any  other  than  public  use,  call  for 
explicit  legislation  on  this  subject,  and  the  extension  of  the  penalties  of  the 
act  of  1846  to  those  receiving  public  money  from  disbursing  agents  and 
others  who  have  public  money  in  their  hands.  The  courts  have  found  diffi 
culty  in  applying  the  act  to  all  cases  within  its  spirit,  because  thought  not 
to  be  technically  within  its  terms. 

"The  amount  transferred  for  disbursement,  during  the  past  fiscal  year, 
was  $38,088,113  92,  at  a  cost  of  $12,945  87  ;  whilst  the  premiums  paid  on 
sale  of  treasury  drafts  have  been  $54,924  16  ;  leaving  $41,978  29  over  and 
above  the  expenses.  It  is  believed  that,  with  care  and  vigilance,  the  trans 
fer  of  public  money  will  hereafter  be  made  through  the  agencies  of  the  trea 
surer,  assistant  treasurers,  and  depositaries,  without  charge  and  without 
risk,  except  under  extraordinary  circumstances,  and  in  peculiar  times.  The 
receipts  and  expenditures,  during  the  past  fiscal  year,  have  amounted  in 
the  aggregate  to  $146,866,933  48,  and  have  all  been  paid  in  the  constitu 
tional  currency  of  gold  and  silver,  without  any  disturbing  effect  upon  the 
currency,  the  banks,  or  business  of  the  country.  However,  the  withdrawal 
and  prohibition  of  the  small-note  circulation  of  the  banks  is  still  deemed 
essential  to  a  sound  and  stable  currency,  and  to  be  called  for  by  the  best 
interests  of  all  the  States."  —  Mr.  Gulhrie's  Report,  December  1st,  1856, 
page  42. 

"  The  sum  of  $38,088,113  92,  composed  of  coin  and  bullion,  has  been 
removed  during  the  year. 

"  This  operation  has  been  effected,  as  a  matter  of  account,  by  737  trans 
fer  drafts  issued  singly,  and  646  issued  in  duplicate  ;  and,  as  a  matter  of 
fact,  in  part  by  actual  transportation,  and  in  the  other  part  by  using  trans 
fer  drafts  in  sums  suitable  to  and  supplying  the  wants  of  the  business  com 
munity,  so  far  as  they  came  within  the  range  of  our  own  convenience  or 
requirements. 

"Accounts  have  been  kept  with  75  disbursing  officers,  whose  credits  have 
been  drawn  upon  and  paid  to  the  amount  of  $6,695,410  56,  on  17,003 
checks. 

"The  sum  of  $4,544,129  44  has  been  transferred,  during  the  year,  from 


618  TRANSMISSION    OF    PUBLIC    FUNDS. 

every  locality  desirous  of  remitting  to  that  city.  Many  of  these 
officers,  therefore,  even  at  distant  places,  have  their  credits 
opened  at  New  York.  They  can  sell  their  checks  upon  that 
credit  for  large  or  small  sums,  and  often  at  a  premium,  and  thus 
draw  from  almost  any  place  on  New  York,  receiving  coin  for  the 
draft.  Neither  is  the  treasury  without  some  facility  in  trans 
mitting  funds  from  other  places  to  New  York ;  this  is  done  by 
furnishing  the  assistant  treasurer  there  with  drafts  on  the  place 
whence  it  is  desired  to  draw  funds,  in  such  sums  as  may  suit  the 
convenience  of  merchants  and  bankers,  who  occasionally  remit 
to  the  point  at  which  the  public  funds  have  accumulated.  The 
drafts  furnished  for  this  purpose  lie  until  they  find  a  purchaser, 
and  if  not  used,  they  are  cancelled. 

In  all  this,  the  government  holds  relations  with  those  who  are 
concerned  with  the  domestic  exchanges.  These  relations,  how 
ever,  are  imperfect,  for  the  treasury  can  only  operate  by  selling 
its  own  drafts ;  it  cannot  become  a  purchaser,  and  it  cannot 
easily  and  promptly  avail  itself  of  circuitous  exchange,  or  indi 
rect  remittances,  by  which  at  times  a  particular  movement  of 
funds  could  be  effected  quicker,  and  at  less  expense,  than  by 
any  direct  mode. 

But,  circumscribed  as  the  operations  of  the  treasury  are,  they 
bend  to  the  customs  of  the  country ;  the  transfer  drafts  drawn 
by  the  Secretary  of  the  Treasury,  whether  sold  in  the  market, 
or  whether  the  specie  is  removed,  the  checks  given  by  disbursing 
officers  on  the  treasury  at  New  York,  or  on  other  officers,  are 

the  assistant  treasurer  at  New  York  to  this  office,  by  means  of  2079  checks 
given  in  exchange  for  coin  previously  placed  in  my  possession,  and  drawn 
in  amounts  placed  to  my  credit  by  the  assistant  treasurer,  in  satisfaction 
of  transfer  drafts,  and  of  drafts  in  my  favor  as  agent  for  paying  the  com 
pensation  of  the  members  of  the  House  of  Representatives. 

"  These  operations,  it  is  evident,  have  afforded  favorable  and  very  accept 
able  accommodation  to  our  business  community  ;  while,  at  the  same  time, 
they  have  relieved  the  department  from  the  onus  of  transporting  that 
amount  of  specie,  which  it  would  otherwise  have  been  compelled  to  en 
counter."  —  Report  of  Mr.  Casey,  Treasurer  of  the  United  States,  to  Mr. 
Gutlirie,  November,  1856,  page  483. 


TREASURY    CURRENCY  —  ITS     BENEFITS.        619 

paper  operations.  He  who  purchases  a  treasury  draft  takes  the 
paper  of  the  treasury ;  the  government  does  not  pay  him  in 
money,  but  gives  him  paper.  It  will  be  found,  when  all  these 
transactions  are  followed  out,  that  the  actual  metallic  currency 
is  departed  from  in  various  ways,  and  to  a  large  extent.  We 
regard  these  modifications  of  the  original  system  as  being  made 
in  the  right  direction  ;  and  believe  that,  as  the  system  becomes 
more  settled,  a  still  larger  discretion  can  be  allowed  to  the  offi 
cers,  not  only  without  danger  to  the  treasury,  but  with  positive 
advantage  to  the  public. 

It  will  be  found,  we  believe,  that  however  close  the  officers 
of  the  treasury  keep  to  the  letter  and  spirit  of  the  law  under 
which  they  act,  in  receiving  and  paying  only  coins,  the  public 
creditors  either  do  not  themselves  receive  the  coins,  or  that  they 
part  with  them  for  bank-notes,  or  a  bank  credit,  at  the  earliest 
possible  moment.  They  fall  into  the  regular  channel  of  busi 
ness,  as  it  is  carried  on  outside  of  the  treasury,  as  soon  as  they 
can.  They  do  not  receive  coins  to  keep,  but  to  pay  away ;  and 
the  government  currency  is  exchanged  at  once  for  that  which  will 
pay  debts  and  make  purchases  with  equal  advantage  and  less 
risk.  The  public  creditors  are  not  able  to  remain  on  the  plat 
form  of  a  metallic  currency  which  is  occupied  by  the  govern 
ment.  They  are  called  up  and  'paid,  and  then  step  off  to  min 
gle  with  their  fellow-citizens  in  the  use  of  the  prevalent  currency. 
Whether  necessary  to  the  government  as  a  system,  or  not,  it  is 
seldom  of  any  advantage  to  the  public  creditor.  It  is  more  than 
probable  that  inconveniences  are  unavoidably  imposed  upon  pub 
lic  creditors  by  this  obligation  of  the  treasury  to  pay  only  in 
coins,  which  far  outweigh  all  occasional  advantages. 

The  apparent  success  of  this  experiment  in  the  United  States 
should  not  betray  any  one  into  the  concession,  without  further 
investigation,  that  this  is  a  wise  or  even  expedient  policy  for 
other  governments,  or  in  other  circumstances.  Two  things 
have  favored  this  measure  —  one  at  its  inception,  and  the  other 
very  soon  afterwards.  The  revenue  of  the  general  government 
of  the  United  States  is  paid  upon  indirect  taxation.  The  bur- 


620   TWO  EVENTS  FAVOR  THE  EXPERIMENT. 

den  is  self-imposed.  No  man  is  bound,  by  law,  to  import  foreign 
goods,  nor  is  any  man  compelled  to  purchase  public  lands; 
those  who  engage  in  such  transactions  know  the  terms  of  pay 
ment  before  they  begin,  and  they  may  refrain  from  the  busi 
ness,  if  they  regard  the  terms  as  too  hard.  If  the  whole  revenue 
of  the  United  States  were  to  be  collected  in  gold  and  silver  by 
direct  taxation,  the  system  would  fall  at  the  first  congressional 
election  after  the  attempt  was  -made.  We  do  not  hesitate  to 
say  that  the  whole  income  of  England  could  not  be  collected  in 
gold  and  silver  for  two  successive  years.  The  people  would 
never  submit  to  it ;  and  the  doctrine,  that  what  is  good  enough 
for  the  people  is  good  enough  for  the  government,  would  be 
proclaimed  in  tones  loud  enough  to  secure  ample  respect  for  the 
law  of  public  usage. 

The  other  circumstance  which  favored  this  experiment  in  the 
United  States  was  the  discovery  and  abundant  product  of  the 
California  gold-mines.  Without  this  unexpected  but  immense 
accession  to  our  stock  of  gold,  this  measure  might  have  fared 
very  differently,  and  might  now  be  standing  by  no  means 
favorably  with  the  public.  As  it  has  turned  out,  the  public 
treasury  proved  to  be  a  reservoir  of  gold  at  the  time  of  the 
commercial  revulsion  of  1857,  and  was  the  means  of  retaining 
§25,000,000  of  gold  in  the  country,  which  would  probably 
have  been  exported,  but  for  its  safe  position  in  the  public 
vaults. 


INDEPENDENT  TREASURY.  621 


$4.  Independent  Treasury  a  result  of  financial  difficulties — State  banks 
and  a  financial  system  —  A  mixed  currency  of  government  paper 
and  specie  —  Opposition  to  banks  and  paper  currency  —  Mr.  Guthrie 
—  Bank  of  France;  luxury  of  severity  —  Banks  not  to  be  crushed,  but 
replaced  —  A  financial  system  founded  on  the  act  q/'1846 —  Treasury  notes 
payable  on  demand  without  interest,  and  at  six  and  twelve  months  with  in 
terest  —  French  loans  of  1854-5  —  Whole  loan  offered  by  the  people  in 
France,  out  of  Paris  —  Board  of  Treasurers  proposed  —  Principles  which 
restrict  the  issue  of  treasury  notes  —  Lenders  of  money,  their  relations  with 
the  treasury  —  Offices  in  Washington  and  New  York — Special  duties  in 
the  proposed  system  —  Necessary  connection  of  the  treasury  with  domestic 
exchange  —  Friction  —  A  remedy  required,  and  the  co-operation  of  the  trea 
sury —  A  national  institution  to  form  the  point  of  contact  between  the  trea 
sury  and  the  domestic  exchange. 

The  chief  feature  of  the  Independent  Treasury,  as  now  ad 
ministered,  is,  that  it  is  contrary  to  the  long-settled  usages  of 
the  people  of  the  United  States.  This  is  a  more  important  fact 
than  many  seem  to  apprehend.  Usages  are  stronger  than  laws ; 
they  may  be  suppressed  for  a  time,  but  are  sure  to  assert  their 
dominion  over  governments,  as  well  as  people,  in  the  end.  The 
best  writers  on  the  elements  of  law  tell  us,  that  permanent  laws 
are  but  the  reflections  of  the  settled  customs  and  institutions  of 
society,  and  that  enactments  which  violate  settled  customs  are 
generally  short-lived ;  that  they  are  either  soon  repealed  by 
usage,  or  modified  and  bent  to  suit  the  customs.  There  cannot 
be  any  doubt  that,  in  this  country,  the  usage  is,  and  has  long 
been,  to  employ  the  credit  system,  and  the  aid  of  banks  and 
paper  currency,  in  all  the  large  transactions  of  industry  and 
trade.  Although  the  constitution  itself  contains  a  provision 
which  makes  gold  and  silver  the  standard  of  payment,  the  people 
treat  it  as  a  standard  to  be  used  only  in  case  of  disagreement. 
They  have  arranged  a  mode  of  payment  far  more  effective,  and 
far  more  economical,  and  this  they  employ  almost  exclusively  in 
large  operations.  This  custom  pervades  and  governs  the  whole 
country ;  and  it  is  very  rare  indeed  that  any  disagreement  be 
tween  parties  compels  a  resort  to  the  standard  of  payment. 
Taking  the  whole  of  the  large  payments  of  the  country  together, 
it  may  be  safely  assumed,  leaving  out  the  national  treasury,  that 


622  DEPARTURE    FROM      USAGE. 

not  one  thousand  dollars  in  a  million  are  paid  in  gold  or  silver. 
The  men  of  business  make  their  purchases  upon  their  own  credit, 
and  thus  issue  every  year  thousands  of  millions  of  dollars  in 
amount  of  commercial  paper ;  all  that  concerns  the  relations  of 
debtor  and  creditor  upon  this  paper  is  settled  by  the  aid  of  the 
banks,  and  other  devices  of  the  credit  system.  The  people  de 
posit  their  money  in  the  banks ;  they  give  and  receive  checks 
upon  the  banks  ;  they  pay  and  receive  bank-notes.  The  govern 
ment  alone  departs  from  this  universal  usage ;  it  abjures  credit, 
banks,  deposits,  and  bank-notes,  and  insists  upon  an  exclusive 
currency  of  gold  and  silver.  We  have  already  remarked  upon 
some  of  the  results.  We  now  add,  without  judging  by  what  has 
occurred,  without  dwelling  further  upon  the  evils  or  inconve 
niences  already  suffered  from  this  measure,  that,  unless  frit 
tered  away  by  the  effects  of  the  opposing  customs  of  the  country, 
it  is  certainly  destined  to  be  the  cause  of  greater  mischiefs. 
The  experiment  is  to  be  tried  in  the  State  of  Ohio,  where  it  will 
have  a  much  shorter  life  than  it  has  had  as  a  measure  of  the 
general  government.  Direct  taxation  and  an  exclusive  currency 
of  the  precious  metals  cannot  stand  together  in  a  government, 
the  usual  currency  of  whose  people  is  paper. 

It  is  indeed  unfortunate,  that  a  government  and  its  people 
should  differ  so  radically  as  has  occurred  in  this  measure  of  the 
government  of  the  United  States,  enforcing  an  exclusive  cur 
rency  of  the  precious  metals  for  its  treasury ;  a  timely  modifi 
cation  may  avert  far  worse  evils  than  any  yet  anticipated.  The 
least  that  can  be  looked  for,  if  it  be  not  modified  by  time,  is 
that  it  may  eventually  crush  the  administration  which  endea 
vors  to  sustain  it.  The  natural  body  may  carry  an  unassimi- 
lated  substance  a  long  time  without  vital  injury ;  but,  soon  or 
late,  it  finds  a  position  in  which  it  destroys  life. 

We  have  stated  our  objections  to  the  present  financial  system 
of  the  United  States  thus  strongly,  not  only  because  we  regard 
them  as  important,  but  that  we  may  be  the  better  understood  in 
our  further  remarks.  We  are  far  from  being  blind  to  the  motives  of 
those  who  projected  the  act  of  1846,  under  which  this  financial 
system  is  carried  out.  The  reasons  which  influenced  them  were 


THE    STATE    BANKS.  62$ 

of  the  strongest  character.  The  wide  extent  of  our  territory ; 
the  numerous  separate  governments  of  the  States,  and  their 
various  systems  of  banking  and  credit ;  the  flagrant,  disastrous 
and  continued  abuses  of  banking  —  must  have  been  obstacles  of 
the  most  serious  kind  in  the  way  of  conducting  successfully  the 
finances  of  the  United  States  previous  to  the  act  of  1846.  We 
know,  indeed,  that  the  differences  of  opinion  in  all  that  con 
cerned  banks,  previous  to  that  time,  as  well  as  since,  rendered  it 
nearly  impossible  to  harmonize  the  operations  of  the  banks  and 
the  treasury.  The  perplexity  arising  from  the  number  of  the 
banks  claiming  a  share  of  the  public  deposits  —  claims  enforced 
by  the  various  States  in  which  the  banks  were  situated,  and  by 
interested  individuals  of  great  political  influence — justified  the 
officers  of  the  treasury,  and  members  of  Congress,  in  looking  for 
some  mode  of  escaping  these  troubles.  Notwithstanding  the 
objections  urged  against  the  present  system,  we  do  not  hesitate  to 
say  that  no  system  likely  to  bo  adopted  in  connection  with  the 
State  banks  would  be  preferable.  A  perfectly  sound  and  well- 
arranged  plan  of  national  finance  might  be  devised,  but  it  would 
savor  of  partiality  ;  and  nothing  of  the  kind  could  withstand  the 
hostile  influences  which  would  be  brought  to  bear  upon  it. 

It  is  not  surprising,  in  our  view,  then,  that  the  idea  of  any 
close  relations  between  the  treasury  of  the  United  States  and 
the  State  banks  was  given  up  as  involving  invincible  difficulties. 
From  considerations  such  as  these  sprung  the  act  of  the  6th  of 
August,  1846.  Some  change  was  inevitable ;  escape  from  the 
financial  troubles  which  had  reigned  for  many  years  was  indis 
pensable.  It  was  the  duty  of  those  who  undertook  to  devise  a 
new  system  to  consider  well  the  actual  condition  and  the  cus 
toms  of  the  country.  They  might  fairly  desire  to  avoid  all  con 
nection  with  the  State  banks  ;  but  they  could,  with  no  propriety, 
overlook  the  fact  that  the  people  of  the  United  States  employed 
the  credit  system,  and  the  agency  of  banks,  in  all  important 
business.  It  was  thqir  duty  to  make  their  new  measure  of  finance 
consistent  with  the  usages  of  the  people.  The  tenor  of  the  act 
of  1846  shows  that  its  framers  were  not  forgetful  of  this  im 
portant  consideration.  The  eighteenth  and  nineteenth  sections 


624  SPIRIT    OF    THE    ACT    OF    184G. 

provide  "  that  all  receipts  into  the  treasury  shall  be  in  gold  or 
silver  coin,  or  in  treasury  notes,  and  that  all  payments  shall  be 
made  in  gold  or  silver  coin,  or  in  treasury  notes,  if  the  creditor 
agree  to  receive  said  notes  in  payment."  This  act  did  nor, 
therefore,  propose  an  abrupt  departure  from  the  customs  of  the 
country  ;  it  did  not  propose  to  enforce  an  exclusive  specie  cur 
rency  for  the  government.  It  proposed  that  all  payments  to 
and  from  the  treasury  should  be  made  in  gold  and  silver  coin,  or 
in  treasury  notes  issued  under  the  authority  of  the  United 
States.  Now,  this  was  offering  to  the  creditors  of  the  govern 
ment  their  choice  of  specie  or  the  very  best  paper  currency 
which  could  be  issued  in  the  country.  No  medium  of  payment 
which  could  be  devised  would  better  accommodate  the  public 
creditors  than  treasury  notes,  issued  in  forms  and  denominations 
to  suit  the  wants  and  convenience  of  the  people. 

We  think  our  financial  system  should  have  been  constructed 
in  the  true  spirit  of  this  statute.  The  receipts  into  the  treasury 
should  have  been,  since  that  time,  only  gold  or  silver  coin,  or 
treasury  notes  ;  and  the  public  payments  should  only  have  been 
in  gold  or  silver  coin,  or  in  treasury  notes  so  issued  as  to  be 
acceptable  and  convenient  to  the  public  creditors,  and  the  people 
at  large.  The  great  defect  of  our  present  system  of  finance  is 
not,  then,  due  to  the  act  of  1846,  but  to  the  manner  in  which  it 
has  been  administered.  Whether  the  manner  of  this  administra 
tion  was  contemplated  when  the  act  was  passed,  we  know  not ; 
but  it  is  certain  that  this  provision  for  treasury  notes,  which 
softened  the  harsh  features  of  the  measure,  has  been  wholly  in 
operative.  Whether  the  passage  of  the  act  was  aided  by  this 
feature,  we  cannot  tell ;  but  it  is  to  be  lamented  that  the  policy 
clearly  indicated  by  the  act,  and  necessary  to  place  it  in  har 
mony  with  the  institutions  and  usages  of  the  country,  should 
have  been,  ever  since,  neglected  or  purposely  abjured. 

It  is  not  difficult,  perhaps,  to  conjecture  how  and  why  this 
one-sided  policy  has  been  pursued  under  the  act  of  1846.  The 
opposition  to  banks  in  the  United  States  has  been  constant  and 
vigorous  for  half  a  century.  It  has  been  stimulated,  as  well  as 
justified,  by  the  very  great  abuses  of  the  system ;  but,  great  as 


A    CIRCULATION    OF    TREASURY    NOTES.         625 

these  abuses  have  been,  the  censure  and  denunciations  poured 
out  upon  the  banks  have  been,  for  the  most  part,  neither  enlight 
ened  nor  discriminating.  The  subject  has  not  been  well  enough 
understood  to  give  the  banks  due  credit  for  the  benefits  they 
confer,  nor  to  point  out  distinctly  the  mischiefs  they  commit. 
In  proportion  as  the  notions  of  the  friends  and  enemies  of  banks 
have  been  indefinite  on  the  whole  subject,  their  imaginations 
have  governed,  and  not  their  judgments.  On  few  subjects  has 
a  wider  difference  of  opinion  existed ;  on  few  subjects  have  men 
been  more  ready  to  pronounce  positive  opinions,  in  direct  con 
flict  with  each  other,  where  the  facts  were  all  before  them.  So 
strong  is  the  feeling  against  banks  in  many  persons,  that  they 
cannot  endure  any  thing  that  resembles  banking.  Paper  cur 
rency  is  their  abhorrence ;  they  look  upon  every  one  as  wronged 
or  cheated,  who  takes  a  small  note  in  place  of  gold  or  silver. 
Such  persons  shudder  at  the  idea  of  treasury  notes  being  issued 
in  denominations  small  enough  to  make  them  a  convenience  to 
the  people  at  large.  They  know  that  bank-notes,  from  one  dol 
lar  upwards,  are  the  general  medium  of  exchange ;  they  regard 
this  currency  with  special  dislike  and  distrust ;  but  they  would 
oppose,  with  all  their  might,  the  issue  of  treasury  notes  as  low 
as  ten  dollars  by  the  government,  in  payment  of  its  debts. 

Treasury  notes,  in  denominations  from  five  to  one  hundred 
dollars,  payable  upon  demand,  issued  under  proper  regulations 
and  checks,  would  constitute  the  safest  possible  currency  for  the 
people  of  the  United  States.  A  hundred  millions  of  such  a  cur 
rency  would  be  absorbed  much  more  rapidly  than  it  would  be 
safe  or  proper  to  issue  it ;  an  issue  only  to  be  made  in  the 
gradual  progress  of  a  system  well  understood  both  by  the 
officers  of  the  treasury  and  the  public  at  large.  Yet  the  pro 
posal  to  issue  such  a  currency  for  the  special  benefit  of  the 
people,  who  are  regarded  as  having  suffered,  and  as  still  suffer 
ing,  from  the  evils  of  banking,  would  be  treated  with  disdain. 
Large  treasury  notes,  for  those  who  have  money  to  lend,  are 
deemed  admissible  and  proper  in  national  finance ;  but  the  sub 
division  of  these  notes,  with  the  view  to  their  becoming  a  general 
convenience  and  security,  would  be  opposed  with  bitterness,  as 
40 


626    FRANCE  —  ITS  TREASURY  AND  BANKS. 

approaching  one  of  the  functions  of  banks  of  circulation.  This 
morbid  jealousy  of  banks  is  not  merely  absurd ;  it  becomes  a 
blunder,  when  carried  to  the  extent  of  preventing  even  the  con 
sideration  of  measures  of  finance  bearing  some  resemblance  to 
the  processes  of  banking.  In  France,  they  are  jealous  of  banks, 
and  desirous  of  restraining  the  development  of  credit  in  that 
form ;  the  government  there,  in  the  administration  of  a  newly- 
reformed  financial  system,  exerts  its  power,  shapes  its  processes, 
and  employs  all  its  opportunities  to  favor  the  operations  of  in 
dustry  and  trade,  because  it  would,  so  far  as  it  can,  limit  the 
power  of  banks,  and  remove  the  occasion  of  establishing  them. 
Here  the  treasury  merely  provides  for  its  own  currency,  its  own 
receipts,  and  its  own  disbursements,  leaving  the  whole  field  of 
industrial  and  commercial  payments  to  the  banks.  The  Bank  of 
France  is  accused,  by  a  late  writer,  of  luxuriating  in  severity  j1 
and  the  government  therefore  affords  all  the  alleviation  possible 
within  the  range  of  the  operations  of  the  treasury :  here,  where 
the  banks  are  even  objects  of  the  severest  attacks  on  the  part 
of  those  in  authority,  we  eschew,  in  doctrine  and  practice,  all 
sympathy,  and  refuse  all  assistance.2  The  banks  have  multiplied 


1  "  C'est  in   September  et  en  October  (1850)  que  la  banque  a  deploy^  ce 
luxe  de  severite  qui  a  si  fort  gSne  le  commerce."  —  Anmiaire  D' Economic 
Politique,  1857,  page  584. 

2  The  following  extract  from  the  Report  of  the  Secretary  of  the  Treasury, 
in  1855,  will  show  that  this  opposition  to  banks  is  not  confined  to  the  ig_ 
norant  and  unthinking,  but  is  shared  by  some  of  the  ablest  and  best  men 
who  have  been  in  the  Treasury  Department :  — 

"  The  Constitution  of  the  United  States  was  framed  by  the  men  who  had 
felt  all  the  evils  thereof;  and  when  provisions  were  inserted  in  that  instru 
ment,  that  no  State  should  emit  bills  of  credit,  nor  make  anything  but  gold 
and  silver  a  tender  in  payment  of  debts,  and  the  coining  of  money  was 
given  to  the  general  government,  they  believed  they  had  provided  for  a  hard 
money  currency,  and  against  the  evils  of  a  depreciated  one ;  but  these  pro 
visions  were  nullified,  when  the  courts  held  that  the  States  had  power  to 
charter  banks,  with  authority  to  issue  and  circulate  notes  as  money.  It  is 
now  too  late  for  the  courts  to  retrace  their  steps,  and  give  a  broader  con 
struction  to  the  prohibitions  of  the  Federal  Constitution,  whilst  it  is  hope 
less  to  expect  the  States  will  refrain  from  granting  bank  charters  with  au 
thority  to  issue  small  notes,  or  that  the  States  will  concur  in  enlarging  the 


NOT    CRUSHED.      627 

here  because  there  has  been  no  effort  to  substitute  any  safer  or 
better  device  of  credit.  The  people  have  been  offered  their 
choice  between  a  currency  of  the  precious  metals  and  a  paper 
currency,  and  they  have  deliberately  chosen  the  latter,  in  the 
face  of  innumerable  warnings  from  the  opponents  of  banks,  both 
in  and  out  of  authority.  The  constant  increase  of  banks  proves, 
beyond  question,  that  they  are  regarded  by  the  people  at  large 
as  an  advantage,  if  not  a  necessity. 

The  only  way  to  check  the  multiplication  of  banks  in  this 
country,  or  to  check  their  operations,  is  to  replace  them  by 
something  better,  or  to  furnish  the  facilities  they  afford,  without 
the  mischiefs  or  hazards.  To  propose  a  currency  of  the  precious 
metals,  which  has  been  persistently  rejected,  as  a  remedy  for 
the  evils  of  banking,  is  not  only  inconsiderate,  but  absurd.  The 
men  of  this  day  and  country  cannot  be  induced  to  go  back  two 
hundred  years  to  a  system  long  abandoned,  and  now  impossible ; 
they  would  endure  quadruple  the  evils  and  vexations  suffered 
from  banks,  before  they  could  be  brought  to  encounter  the  ex- 


constitutional  prohibition  in  respect  to  bills  of  credit,  so  as  to  prohibit  this 
power  to  banks.  The  same  local  and  individual  interests  that  induce  the 
granting  of  bank  charters  with  this  privilege,  would  induce  the  Legislatures 
of  the  States  to  refuse  to  Congress  the  power  of  prohibiting  the  use  and  cir 
culation  of  bank-notes.  The  thirteen  hundred  banks  now  in  existence  under 
State  charters,  and  the  circulation  of  over  $200,000,000  of  bank-notes  as 
money,  in  constant  competition  with  the  constitutional  currency,  attest  the 
magnitude  of  the  evil,  and  justify  the  worst  apprehensions  for  the  future. 
The  gradual  increase  of  banks,  banking  capital,  and  bank-note  circulation, 
calls  for  repressive  action  under  appropriate  State  legislation.  When  these 
thirteen  hundred  banks  shall  be  increased  to  some  two,  three,  four  or  five 
thousand,  it  may  be  feared  their  aggregate  power  will  not  be  easily  over 
come  until  a  suspension  of  specie  payments,  and  universal  bankruptcy,  shall 
call  for  a  suppression  of  the  evil,  and  a  restoration  of  the  constitutional  cur 
rency.  If  the  States  shall  continue  the  charter  and  multiplication  of  banks 
with  authority  to  issue  and  circulate  notes  as  money,  and  fail  to  apply  any 
adequate  remedy  to  the  increasing  evil,  and  also  fail  to  invest  Congress 
with  the  necessary  power  to  prohibit  the  same,  Congress  may  be  justified 
in  the  exercise  of  the  power  to  levy  an  excise  on  them,  and  thus  render  the 
authority  to  issue  and  circulate  them  valueless.  —  Report  of  Mr.  Gitthrie, 
Secretary  of  the  Treasury,  December  3d,  1855,  pages  22-3. 


628       TREASURY  NOTES  A  CURRENCY. 

pense,  the  risks  and  slow  movements  of  an  exclusively  metallic 
currency. 

When  the  banking  system  of  this  country,  the  power  and 
efficacy  of  which  for  public  advantage  cannot  be  denied,  whatever 
may  be  its  equally  undeniable  abuses  and  perversions,  is  to  be 
superseded,  whether  for  the  special  benefit  of  the  public  trea 
sury,  or  from  commercial  considerations,  the  inquiry  must  be 
not  how  to  introduce  coins,  but  how  to  find  a  substitute  for 
banks,  or  how  to  secure  the  facilities  of  banking  without  its  mis 
chiefs.  The  solution  of  this  problem  has  made  little  progress, 
because  the  discussion  has  been  too  much  confined  to  the  arena 
of  party  politics.  On  the  one  hand,  the  eifort  has  been  to  force 
the  banks  upon  the  public  just  as  they  are;  and  on  the  other,  the 
effort  has  been  to  reject  them  altogether,  without  a  substitute. 
The  parties  to  this  discussion  have  elicited  no  truth,  and  set 
tled  no  principles.  The  people,  however,  have  not  stood  still  in 
the  meantime,  but,  finding  the  immense  power  afforded  by  banks, 
they  have  multiplied  them  in  a  rapid  ratio,  although  no  progress 
was  making  in  the  solution  of  the  problem  involved. 

We  entertain  no  doubt  that  a  sound  financial  system  for  the 
United  States  can  be  successfully  constructed  upon  the  act  of 
August,  1846,  establishing  the  Independent  Treasury.  The 
public  creditors  should  be  offered  their  choice  of  payment  in 
coins  or  paper,  as  that  act  contemplates ;  and  this  offer  should 
not  be  a  mockery ;  the  proffered  treasury  notes  should  be  issued 
in  such  denominations  as  would  make  them  a  positive  advantage 
and  convenience  to  the  public.  They  are  issued,  in  Prussia,  as 
low  as  five  dollars,  much  to  the  satisfaction  of  the  people  not 
only  of  Prussia,  but  of  other  German  States  in  which  they  cir 
culate.  There  is  no  solid  financial  objection  to  issuing  treasury 
notes,  in  the  United  States,  as  low  as  ten  dollars,  if  such  an 
issue  were  desired  by  the  people,  and  of  course  none  to  the  issue 
of  other  and  higher  denominations,  to  which  they  are  accus 
tomed.  Treasury  notes  payable  on  demand  should,  doubtless,  be 
issued  with  great  precautions,  and  upon  a  system  which  would 
ensure  their  punctual  redemption  at  all  the  offices  of  the  trea 
sury.  They  would  not  be  payable  with  interest,  because  they 


TREASURY  NOTES  UPON  INTEREST.      629 

would  be  issued  for  circulation  and  for  public  convenience ;  and 
all  the  advantage  the  government  would  derive  from  this  circu 
lation  would  go,  in  the  first  place,  to  meet  the  expense  of  the 
issue ;  and  in  the  next,  to  the  public  benefit,  and  to  the  allevia 
tion  of  the  burdens  of  taxation. 

The  treasury,  then,  would  receive  only  gold  or  silver  coin,  or 
its  own  notes,  for  all  dues  to  the  government ;  and  would  pay 
all  creditors  either  in  coins,  or  in  notes,  as  they  preferred.  When 
the  government  issued  a  treasury  note  in  payment,  it  would  pay 
one  debt  by  contracting  another ;  when  it  received  one  of  its 
notes  for  customs  or  lands  into  the  treasury,  a  debt  would  be 
paid  to  it,  and  it  would  be  acquitted  of  a  debt.  Treasury  notes 
returned  extinguish  an  equal  amount  of  notes  issued.  The  whole 
incoming  revenue  would  be  a  fund  constantly  applied  to  the 
redemption  of  the  treasury  notes,  a  demand  for  which  could  not 
subside  so  long  as  there  were  debts  due  to  the  treasury.  An 
issue  of  this  kind  should  be  kept  strictly  within  the  amount  of 
probable  available  revenue;  and  then,  if  presented  for  the  specie, 
the  same  amount  of  the  revenue  would  become  payable  in  specie. 
The  treasury  would  be  obliged  skilfully  to  adjust  its  issues,  and 
the  distribution  of  its  funds,  so  as  to  be  prepared  not  only  for 
the  regular  progress  of  its  business,  but  for  emergencies. 

To  enable  such  a  system  to  work  well,  and  attain  its  legitimate 
growth,  it  should  have  assistance  like  that  furnished  in  England 
by  the  Exchequer  bills.  This  would  be  furnished  by  treasury 
notes  of  $100,  §500,  and  $1000,  bearing  daily  interest,  issued 
in  an  acceptable  form,  payable  in  six,  eight  or  twelve  months. 
These  should  be  accessible,  at  all  the  offices  of  the  treasury,  in  such 
sums  as  gradually  to  attract  a  class  of  lenders  who  would  habitu 
ally  depend  on  them  for  temporary  investment.  By  punctual 
payment  of  these  securities  at  maturity,  by  keeping  up  the  sup 
ply,  the  number  of  competitors  for  them  would  constantly  in 
crease  ;  and  a  regular  as  well  as  growing  demand  for  them  could 
be  established,  which  would  place  at  the  disposition  of  the 
government,  upon  emergency,  almost  any  desired  sum.  The 
constant  supply  of  money  which  would  thus  be  poured  into  the 
treasury  in  specie,  would  furnish  an  unfailing  resource  in  every 


630  FRENCH    LOANS    OF    1854,     1855. 

locality  for  the  redemption  of  such  of  the  small  treasury  notes  as 
might  be  presented  for  payment  in  coin.  The  effect  of  thus 
opening  a  communication  between  the  government  and  lenders 
of  money,  by  a  security  adapted  to  their  wishes,  and  constantly 
renewed,  so  as  to  give  all  an  opportunity,  can  only  be  appre 
ciated  by  those  who  have  studied  the  English  system  of  Exche 
quer  bills  in  that  aspect,  or  the  French  system  as  it  is  now  con 
nected  with  the  domestic  exchanges.  The  last  French  loans 
furnish  an  illustration  : ] — 

Loan  of  1854.  Loan,  Jan.  1&55.  Loan.  July,  185ck 

Francs.  Francs.  Francs. 

Amount  asked  by  government 250,000,000  500,000,000  750,000,000 

«       of  the  sums  offered 467,000,'»00  2,175,000,000  3,653,000,000 

•        offered  in  Paris,  and  from  other  I            mm  j^000|OW)  2,534,000,000 

countries ) 

"       offered  in  the  departments 253,000,000  777,000,000  1,110,000,000 

Whole  number  of  subscribers 98,000  177,000  317,000 

Subscribers  at  Paris,  and  in  other  countries.           26,000  51,000  80,000 

Subscribers  in  the  departments 72,000  126,000  237,000 

Upon  the  occasion  of  these  three  loans,  the  people  out  of  Paris 
tendered  more  than  the  whole  amount  required  by  the  government, 
The  offering  for  these  loans  astonished  all  Europe.  It  was  made 
abundantly  clear,  that  the  government  of  France  was  not  de 
pendent  upon  the  capitalists  of  Paris,  of  England,  of  Holland, 
Belgium  or  Germany,  for  loans  even  of  this  great  magnitude. 
The  second  loan  of  1855,  for  over  $100,000,000,  attracted 
no  less  than  237,000  bidders  in  the  heart  of  France,  without 
including  Paris.  This  extraordinary  and  prompt  liberality  was 
almost  wholly  owing  to  the  relations  maintained  by  the  receivers- 
general  of  the  departments  with  the  men  of  business.  More  than 
200,000  men  were  found  ready  to  assist  the  treasury  which  had 
favored  them.  Those  who  had  money  to  lend  were  generally 
known  to  these  receivers  and  their  officers.  The  ultimate  power 
of  a  treasury,  thus  conducted,  is  beyond  estimate ;  but  it  is  a 
power  which  would  vanish  at  once,  if  abused.  It  is  a  power 
which  ought  to  exist  in  every  nation,  because  it  can  be  so  exer 
cised  as  greatly  to  alleviate  the  burdens  of  taxation,  and  prove 
a  ready  resource  in  cases  of  financial  embarrassment. 

1  Annuaire  de  I'Ecoaomie  Politique,  1856,  page  471. 


A    BOARD     OF    TREASURERS.  631 

If  it  be  objected,  that  all  this  involves  dangerous  abuses, 
great  complications,  and  subsequent  disasters,  we  reply  that  the 
present  system  involves  greater  mischiefs  and  disorders,  and  final 
disasters  far  greater,  because  the  immediate  causes  are  lc?S 
visible.  No  system  of  national  finance  can  be  complete  without 
some  complication ;  but  there  is  skill  and  ability  enough  in  this 
country  to  surmount  all  this  difficulty.  It  should  not  be  over 
looked,  however,  that  our  national  system  should  be  constructed 
with  a  view  to  the  tendencies  of  the  national  mind,  and  the  busi 
ness  habits  of  the  people  ;  it  will  then  be  not  only  more  popular, 
but  find  the  most  skilful  conductors.  In  the  proposed  system, 
there  are  special  features  which  make  wise  provisions  neces 
sary,  the  administration  of  which  would  require  special  skill  and 
experience  in  such  matters  ;  of  these  requisites,  and  the  needful 
integrity,  it  is  to  be  hoped  the  country  is  not  deemed  to  be  desti 
tute.  The  Secretary  of  the  Treasury,  the  Treasurer  of  the 
United  States,  the  Directors  of  the  mints,  and  all  the  assistant 
treasurers,  might,  ex  officio,  be  formed  into  a  board  to  which  this 
whole  system  could,  under  a  well-devised  plan,  be  safely  en 
trusted.  To  remove  so  important  and  delicate  a  task  from  the 
arena  of  politics,  the  members  of  this  board  should  hold  their 
offices  for  a  fixed  period,  and  be  then  ineligible ;  one-fourth  of 
the  board  should  go  out  every  year. 

It  is  very  true  that,  as  the  people  wrould  prefer  this  cur 
rency  not  only  to  bank-notes,  but  to  gold  or  silver,  a  much 
larger  amount  could  be  thrown  at  once  into  circulation  than 
would  be  expedient.  To  determine  the  proper  amount  to  be 
issued  would,  from  the  beginning,  be  a  serious  question ;  but, 
grave  as  the  mistakes  which  have  been  committed  in  this  respect, 
there  are  principles  which  would  safely  guide  even  governments 
in  issuing  notes  payable  on  demand.  The  banks  of  circulation 
have  been  recommended  to  keep  one-third  of  the  amount  of  their 
issues  in  specie  as  a  sufficient  protection.  This  never  deserved 
to  be  called  a  rule,  or  a  principle.  It  is  not  even  a  reasonable 
conjecture.  The  true  principle  of  such  circulation  is,  that  it 
should  be  returned  by  the  debtors  at  a  rate  equal  to  that  at 
which  it  is  issued.  The  debtors  of  a  nation,  or  a  bank,  are  its 


632  PRINCIPLES    OF    A    TREASURY    ISSUE. 

proper  agents  of  redemption.  If  a  bank  issues  notes  payable  on 
demand,  which  the  process  of  paying  debts  at  the  bank  does  not 
return  as  rapidly  as  they  are  sent  forth,  it  mnst  eventually  be 
called  upon  to  pay  them  in  specie  at  a  time  when  it  may  be  in 
convenient  or  impossible.  The  debts  due  to  a  bank  should 
absorb  all  its  circulation,  or  return  some  currency  that  would 
pay  it ;  whenever  this  rule  is  violated,  there  is  danger.  The 
banks  incur  this  danger  habitually  by  discounting  paper  at  the 
average  time  of  two  months,  and  giving  their  own  notes  payable 
on  demand.  They  stand  the  hazard  of  the  two  months,  even  if 
the  return  current  should  finally  be  of  the  same  volume  as  the 
one  outward.  Under  this  rule,  they  can  never  be  safe,  and 
people  can  never  feel  that  they  are  safe. 

The  rule  by  which  a  government  may  issue  paper,  is  the  rate 
of  the  receipt  of  the  revenue.  The  payments  into  the  treasury 
should  return  all  the  notes  issued,  or  the  gold  or  silver  that 
would  redeem  them.  The  amount  issued  should  be  kept  so  far 
within  the  receipt  of  the  revenue,  that  no  probable  deficiency  of 
the  income  can  ever  disturb  the  process  of  redemption.  There 
will  be  no  difficulty  in  providing  specie  to  pay  all  that  could  be 
demanded  under  the  exceptions  to  this  rule. 

In  the  case  of  a  public  treasury  issuing  notes  payable  on  de 
mand,  it  may  occur  that,  being  everywhere  acceptable,  and 
having  a  wide  range  of  circulation,  they  would  remain  in  the 
hands  of  the  public,  and  thus  leave  the  treasury  to  an  increasing 
use  of  the  precious  metals,  or  to  the  issue  of  a  larger  proportion 
of  treasury  bills  to  meet  the  constantly  increasing  demand  for 
them  on  the  part  of  the  public  creditors.  If  this  demand  were 
complied  with,  the  amount  in  circulation  would  soon  run  up  to  a 
large  sum,  and  they  might  be  thrown  back  on  the  treasury  at  a 
very  inconvenient  time.  This  difficulty  would  have  to  be  met, 
for  the  issues  of  a  treasury  may  circulate  far  too  widely  to 
be  always  within  the  reach  of  those  who  would  pay  duties,  or 
pay  for  land.  As  a  means  of  overcoming  this,  treasury  notes 
might  be  issued  payable  within  six  months  on  demand,  and  after 
that  time  payable  with  interest  on  such  days  as  the  government 
might  appoint,  but  receivable  at  all  times  for  dues  at  the  trea- 


TREASURY  NOTES  FOR  INVESTMENT.     633 

sury.  No  accumulation  beyond  six  months  could  then  be  brought 
suddenly  upon  the  treasury,  and  no  loss  could  accrue  to  the 
holder,  for  his  note  would  bear  interest  from  the  time  it  ceased 
to  be  payable  on  demand ;  and  both  banks  and  individuals  all 
over  the  country  would  gladly  take  them  as  an  investment. 
These  notes,  however,  should  be  all  paid  off  within  the  year  ;  of' 
which  payment,  day  and  place,  the  holders  should  be  duly  noti 
fied  in  the  public  journals. 

An  issue  of  treasury  notes  would,  upon  this  plan,  in  a  few 
years  reach  the  sum  of  at  least  $100,000,000,  and  displace 
nearly  that  amount  of  bank-notes,  by  furnishing  a  medium  which 
would  be  equally  good  in  every  part  of  the  country.  This  is  the 
best  mode  of  reducing  the  circulation  of  bank-notes,  and  limiting 
their  power;  it  is  only  by  furnishing  something  better  —  a  cur 
rency  more  convenient,  more  acceptable  throughout  our  whole 
territory,  and  more  reliable  —  that  people  can  be  induced  to 
forego  the  benefits  of  the  banking  system.  The  use  of  a  bank 
currency  is  so  rooted  in  the  habits  and  usages  of  the  people  of 
the  United  States,  that  nothing  can  eradicate  it  but  a  better 
paper  currency.  They  will  give  up  their  reliance  on  banks  just 
in  proportion  as  something  else,  as  consonant  with  their  modes 
of  business,  and  more  safe,  is  offered  as  a  substitute. 

The  issue  of  treasury  notes  for  circulation,  and  to  be  taken  at 
the  option  of  the  public  creditors,  would  be  incomplete  in  another 
respect,  as  a  measure  of  national  finance,  without  an  issue  of 
larger  denominatiens,  bearing  interest,  for  the  advantage  of 
those  who  desire  to  make  investments  in  government  securities. 
The  people  should  not  only  have  an  opportunity  of  lending  to 
the  government  —  they  should  be  accustomed  to  it.  Financial 
skill  and  experience,  and  the  combined  knowledge  of  the  various 
treasurers,  could  alone  tell  what  amount  of  these  treasury  notes, 
bearing  interest  from  date,  should  be  issued.  It  should  be  large 
enough  to  attract  special  attention  throughout  the  country, 
for  they  should  be  made  accessible  in  as  many  places  as  practi 
cable  ;  it  should  also  be  great  enough  to  supply  all,  or  a  con 
siderable  proportion,  of  those  who  desire  this  kind  of  security. 
This  demand  would  be  different  from  that  which  exists  for 


634      TREASURY    TO    HOLD    RESERVE    OF    SPECIE. 

Exchequer  bills  in  Great  Britain ;  there  it  has  a  larger  scope, 
because  the  amount  required  is  greater,  and  because  the  govern 
ment  receives,  in  exchange  for  Exchequer  bills,  both  notes 
and  checks  on  the  Bank  of  England ;  here  the  treasury  would 
only  receive  its  own  notes,  gold  or  silver  coins,  or  bullion.  Our 
treasury  would  become  then,  the  reservoir  of  all  the  spare 
bullion  and  coins  in  the  country.  Now,  as  soon  as  the  precious 
metals  become  abundant,  they  are  shipped  abroad,  where  there 
is  always  debt  to  pay.  The  banks,  too,  would  promptly  avail 
themselves  of  a  facility  affording  them  not  only  interest  for 
specie  they  could  spare,  but  giving  them  a  security  which  would 
command  the  specie  in  case  of  emergency.  Now,  they  lose  in 
terest  on  all  their  reserve  of  gold  or  silver,  and  are  of  course 
tempted  to  make  that  reserve  small ;  the  specie  which  is  not 
immediately  wanted  now  goes  across  the  Atlantic,  and  cannot 
be  recovered  to  meet  an  unexpected  demand.  If  London,  or 
Paris,  or  Hamburg,  is  in  pressing  need  of  a  supply  of  the  pre 
cious  metals,  a  few  days  only  are  needed  to  furnish  them  ;  but 
we  have  no  such  convenient  resource.  The  government  here 
should  keep  that  reserve,  which  neither  banks  nor  individuals 
will  be  at  the  expense  of  maintaining.  If  the  government  here 
would  but  pay  interest  for  the  specie  offered  to  it  upon  six  or 
twelve  months'  treasury  notes,  an  ample  supply  might  be  always 
on  hand  to  aid  the  banks,  or  assist  in  regulating  the  currency. 
The  issue  of  treasury  notes  upon  interest  here  contemplated 
should  be  regarded  as  a  purely  financial  operation,  and  be  under 
the  direction  of  the  Board  of  Treasurers.  The  money  thus  ad 
vanced  to  the  government  should  not  be  the  subject  of  appro 
priation  by  Congress,  or  of  draft  by  the  Secretary  of  the  Trea 
sury,  except  under  regulations,  and  to  an  extent,  fixed  by  the 
Board.  It  should  be  an  aid  to  the  treasury,  but  should  never 
be  absorbed  or  broken  down  by  it.  No  temporary  wants  of  the 
treasury  should  ever  disturb  the  punctual  discharge  of  treasury 
notes  made  payable  at  a  day  named.  So  long  as  this  punctuality 
was  observed,  they  would  be  sought  for  and  would  absorb  large 
amounts  of  the  smaller  denominations  made  payable  on  demand. 
These  two  modes  of  issue  would,  with  careful  attention,  work 


635 

together  like  the  wheels  of  a  clock,  and  ultimately  give  the  trea 
sury  great  power  for  useful  financial  regulation  in  all  that  con 
cerns  the  currency  of  the  country  —  a  power  which  would  be 
efficient  in  proportion  as  it  could  be  skilfully  and  wisely  exer 
cised,  and  which  would  cease,  if  awkwardly  or  improperly 
employed. 

The  effect  of  this  would  be,  that  the  people  of  the  United 
States  would  sustain  an  issue  of  small  notes  by  the  government, 
not  bearing  interest,  which  would  much  more  than  pay  the 
interest  of  a  large  amount  of  the  precious  metals  kept  in  the 
treasury  to  support  the  currency,  and  strengthen  the  credit  of 
the  country  and  its  institutions  in  those  times  of  peril  and  diffi 
culty  which  must  be  expected  occasionally  in  the  complicated 
movements  of  industry,  trade  and  credit. 

Two  features  should  be  prominent  in  the  Independent  Trea 
sury,  if  amended  in  accordance  with  such  or  similar  suggestions. 
The  Assistant  Treasurer  of  New  York  should  have,  under  pro 
per  regulations  and  supervision,  the  charge  of  all  the  movements 
and  distribution  of  the  public  moneys.  This  would  be  a  respon 
sible  duty ;  but  it  can  be  best  understood,  and  best  executed,  by 
the  first  officer  of  the  treasury  in  New  York.  All  needful  facili 
ties  and  information  are  most  easily  accessible  there. 

The  other  would  be,  that  the  office  of  the  Treasurer  in  Wash 
ington  should  furnish  a  complete  exhibit  of  all  the  funds  in  all 
the  treasuries,  not  merely  by  an  account  with  each  sub-treasury, 
but  by  a  complete  summary  of  the  books  at  each  office.  All 
financial  agents,  all  disbursing  officers,  and  others  having  charge 
of  public  money,  should  make  report  to  the  chief  office  at  Wash 
ington,  as  well  as  to  any  other  offices  with  which  they  might 
be  in  connection. 

But  whatever  may  be  the  system  of  national  finance  adopted 
by  the  United  States,  or  indeed  by  any  other  nation,  if  it  be 
sound  and  comprehensive,  it  must  involve  some  relations  with 
the  domestic  exchanges  of  the  country.  This  is  especially  the 
case  in  our  system  of  confederated  States,  covering  so  great  a 
territory,  each  of  which  has  its  own  laws  and  commercial  cus 
toms.  The  home  trade  of  the  United  States  far  exceeds  the 


C36  FRICTION    OF    DOMESTIC    EXCHANGE. 

foreign  trade  between  any  of  the  countries  of  Europe,  in  propor 
tion  to  the  population.  There  the  boundaries  between  the  dif 
ferent  nations  makes  that  foreign  trade  which  here  is  domestic 
trade ;  there  that  is  foreign  exchange  which  here  is  domestic 
exchange.  That  the  internal  exchanges  of  the  United  States 
are  accomplished  with  as  little  movement  of  the  precious  metals 
as  the  same  amount  anywhere  else,  is  probable  ;  but  that  a  vast 
amount  of  unnecessary  friction  exists,  which  might  be  saved,  is 
very  certain.  It  is  not  the  friction  of  transmitting  gold  and 
silver,  so  much  as  the  friction  of  credit ;  it  is  that  which  arises 
from  want  of  concert,  from  want  of  information,  and  from  the 
immense  number  of  agencies  employed  in  it.  A  system  is 
needed,  which  only  the  power  of  the  national  government  can 
give ;  a  power  certainly  within  the  letter  and  spirit  of  the  con 
stitution. 

Foreign  exchange,  which,  like  domestic  exchange,  is  only  a 
mode  of  setting-off  debts  against  debts,  by  the  mode  of  its  opera 
tion  becomes  concentrated  upon  a  few  points,  and  in  few  hands. 
The  foreign  exchange  of  this  country  is  chiefly  carried  on 
through  New  York,  and  by  the  agency  of  a  few  persons  there, 
because  it  is  scarcely  the  interest  of  many  to  form  foreign  con 
nections,  with  a  view  to  so  limited  a  business.  The  friction  of 
this  exchange  is  therefore  small,  and  the  business  is  transacted 
with  facility,  because  few  are  engaged  in  it.  The  domestic 
exchange,  on  the  other  hand,  involving  more  than  five  times  the 
amount,  with  less  difficulty  in  forming  the  needful  connections, 
becomes  a  favorite  business  with  the  public  banks,  a  host  of  pri 
vate  bankers,  brokers  and  merchants.  From  this  ensues  not  only 
much  friction  and  many  complications  in  the  movement,  but  a 
wide  field  is  opened  for  fictitious  operations  in  exchange.  Undue 
competition  of  parties  thus  dealing  in  exchange  induces  them  to 
offer,  sometimes,  more  than  legitimate  facilities,  and  at  other  times 
to  ask  more  than  reasonable  rates  for  their  agency ;  at  the  best, 
it  is  productive  of  mischievous  and  embarrassing  rivalry,  and  is 
the  cover  of  not  a  few  of  the  worst  abuses  of  the  credit  system. 

Domestic  exchange  involves  the  adjustment  of  the  debts  of 
those  who,  though  of  the  same  country,  are  yet  so  remote  as  to 


ADVANTAGES    OF    CLEARING.  637 

require  correspondence,  and  the  agency  of  third  parties.  As 
effected  by  the  processes  of  the  credit  system,  it  is  almost  as 
simple  as  the  mode  of  adjustment  when  the  parties  reside  in  the 
same  city,  for  both  are  accomplished  by  means  of  banks,  or  those 
acting  as  bankers.  But  whilst  three  score  of  banks  in  New  York 
may  be  engaged  in  making  the  adjustments  of  the  men  of  busi 
ness  in  that  city,  the  vicinity  of  these  banks  to  each  other  ena 
bles  them,  without  great  trouble,  to  make  the  daily  settlements 
between  themselves  which  inevitably  accrue  from  the  dealings  of 
their  customers.  The  business  of  these  adjustments  between  the 
banks  of  New  York  became,  however,  at  last  so  burdensome,  as 
to  require  a  special  facility,  which  was  found  in  a  clearing 
house.  If  the  business  done  in  all  the  banks  of  New  York  was 
confined  to  five  or  six  of  the  number,  they  would  need  no  clear 
ing-house  ;  it  would  be  as  convenient  to  settle  with  each  other  in 
the  old  way.  So,  if  the  domestic  exchange  in  each  city  is  con 
trolled  by  a  few  banks  or  persons,  it  may  work  smoothly,  where 
otherwise  there  would  be  friction.  We  refer  to  this,  however, 
only  by  way  of  illustration ;  for,  if  the  number  of  those  in  our 
chief  cities  dealing  in  exchange  were  ever  so  reduced,  there 
would  remain  a  necessity  of  providing  a  national  system  by 
national  legislation.  If  the  banks  in  many  of  our  cities  now  find 
themselves  compelled,  from  motives  of  economy  and  facility  in 
business,  to  resort  to  the  processes  of  a  clearing-house,  the  same 
reasons  apply,  with  far  greater  force,  to  the  adjustments  or  set 
tlements  arising  out  of  the  domestic  exchange.  The  daily  clear 
ing,  or  mutual  balancing  of  accounts,  between  the  fifty  or  sixty 
banks  in  the  city  of  New  York,  amounts  to  over  §20,000,000. 
But,  large  as  this  sum  is,  it  must  fall  far  below  the  amount  paid 
each  day,  in  the  United  States,  in  the  operations  of  domestic 
exchange.  If  we  take  all  the  cities,  towns  or  places  of  business 
in  the  United  States,  each  one  has  its  daily  maturing  claims  on 
all,  or  a  portion  of  the  others ;  each  place,  leaving  out  of  view 
individuals,  may  be  said  to  have  a  certain  claim  upon  all  the 
others,  and  to  be  subject  to  claims  from  all. 

New  York  has  each  day  a  claim  upon  other  cities  and  places, 
and  is   subject  to  certain  claims   from  other  places.     If  the 


C38  DOMESTIC    EXCHANGE  —  ITS    AGENCY. 

amounts  were  known,  it  could  be  stated  whether,  upon  any  par 
ticular  day  or  week,  the  balances  were  in  favor  or  against  New 
York  with  all  other  places  in  the  United  States ;  and  so  with 
regard  to  Philadelphia,  Boston,  and  other  cities.  All  this  vast 
business  of  payments  between  separate  places,  from  Maine  to 
Texas,  and  from  California  and  New  York,  is  adjusted  every 
secular  day  through  the  agency  of  banks,  or  bankers.  Who  can 
conjecture  the  amount  of  payments  involved  in  this  adjustment? 
We  know,  generally,  that  these  payments  follow  upon  commer 
cial  transactions  which  have  gone  before ;  that  commodities 
have  been  sent  from  the  North  to  the  South,  and  from  the 
South  to  the  North,  and  likewise  from  East  to  West,  and  from 
West  to  East,  and  that  the  paper  securities  which  go  into  the 
banks  exactly  represent  the  amount  of  the  transactions,  and  the 
market  values  involved ;  but  the  sum  of  all  these  we  have  no 
means  of  knowing.  We  know  that,  mainly,  the  commodities 
sold  and  transmitted  pay  for  each  other,  and  that  the  balances 
paid  in  coins  are  comparatively  very  small.  A  thousand  per 
sons  in  Pennsylvania  may  be  dealing  with  a  thousand  in  Loui 
siana,  to  the  yearly  amount  of  $10,000,000.  They  send  money 
from  neither  side ;  the  debtors  in  Pennsylvania  pay  the  cre 
ditors  in  that  State,  and  in  Louisiana  the  same ;  and  that  is 
accomplished  by  the  operations  of  domestic  exchange,  and  the 
agency  of  the  banks. 

But  this  business,  as  now  effected,  involves  needless  expense, 
trouble  and  time.  It  must  be  evident  that  this  adjustment  be 
tween  Pennsylvania  and  Louisiana,  involving  $10,000,000  on 
each  side,  can  be  made  with  more  or  less  facility,  according  to 
the  number  engaged  in  it.  If  an  hundred  are  engaged  on  each 
side,  they  would  be  claimants,  on  the  average,  of  §100,000 
each ;  two  hundred  persons  would  be  corresponding  on  the  sub 
ject,  two  hundred  sets  of  books  would  contain  the  accounts,  and 
quite  a  complicated  adjustment  would  remain  to  be  made  on 
each  side  between  these  hundreds  of  agents,  besides  that  which 
would  have  to  be  made  by  each  one  with  his  customers.  If  the 
number  engaged  were  reduced  from  a  hundred  on  each  side  to 
five  or  one,  it  is  plain  that  the  labor,  complications  and  expense 


DOMESTIC    EXCHANGE  —  CLEARING.  639 

would  be  reduced  in  proportion.  Our  domestic  exchange  is  now 
conducted  on  the  cumbrous  plan  supposed ;  as  banks  and 
bankers  increase,  the  confusion  increases,  and  the  expense  and 
friction  must  also  increase. 

Not  merely  the  individuals  concerned  in  this  domestic  ex 
change  need  a  new  facility  in  these  circumstances,  the  banks 
and  bankers  who  are  their  agents  need  it  still  more ;  they  need, 
in  the  business  of  the  domestic  exchange,  an  institution  which 
should  approximate  to  the  operation  of  a  clearing-house.  If 
every  bank  or  banker  in  New  York,  who  discounts  or  purchases 
a  bill  or  note  payable  at  any  other  place,  could  at  once  send  it 
to  an  office  of  exchange  in  that  city,  the  books  of  that  office 
would  show  each  day  the  claims  of  New  York  upon  all  the  rest 
of  the  country ;  and  its  correspondence  would  show  the  claims 
of  all  the  rest  of  the  country  each  day  upon  New  York ;  and 
the  same  of  such  an  office  in  every  other  city.  The  whole  busi 
ness  of  domestic  exchange  might  be  thus  concentrated  in  every 
city  at  one  office,  in  which  would  be  exhibited  daily  the  debts 
and  credits  of  that  city,  and  its  dependencies  to  and  with  all 
others. 

It  is  obvious  that  offices  of  domestic  exchange  thus  represent 
ing  whole  cities  or  districts,  and  concentrating  their  debts  and 
credits,  could  settle  their  mutual  claims  with  a  facility  nearly 
equal  to  the  operations  of  a  clearing-house.  Even  the  immense 
sums  involved  in  the  mutual  claims  between  New  York  and 
Philadelphia,  and  daily  paid  off  and  settled  by  correspondence 
between  hundreds  of  banks,  bankers,  brokers,  and  merchants, 
in  which  letters  and  remittances  cross  each  other  in  an  endless 
variety  of  ways,  and  with  an  amount  of  labor  and  friction  be 
yond  estimate,  would  be  seen  at  a  glance,  their  magnitude  and 
importance  appreciated,  fnd  the  amount  nearly  paid  off  by  the 
columns  of  a  ledger.  The  aggregate  indebtedness  of  the  cities, 
each  to  the  other,  would  be  discharged  as  an  aggregate  liability. 
Each  bank,  or  person  concerned,  would  have  only  to  account 
with  their  customers  according  to  their  relations  with  each 
other ;  amounts  due  by  individuals  in  New  York  to  persons  in 
Philadelphia  would  be  placed,  in  New  York,  to  the  credit  of 


640     INSTITUTION    TO    AID    INTERNAL    EXCHANGE. 

those  to  whom  persons  in  Philadelphia  were  indebted ;  and  so 
with  individuals  in  Philadelphia  creditors  or  debtors  of  persons 
in  New  York ;  both  classes  would  make  and  receive  their  pay 
ments  in  their  own  city.  The  office  proposed  would,  in  a  few 
hours,  change  the  indebtedness  between  individuals  residing  in 
different  States  or  cities  into  indebtedness  between  parties  in 
the  same  vicinity,  neighbors  and  customers  of  the  same  bank, 
and  well  known  to  each  other. 

By  the  agency  of  offices  established  for  the  express  purpose 
of  aiding  domestic  exchange,  the  government  could  distribute 
perfectly,  promptly,  at  the  least  risk,  and  with  the  least  ex 
pense,  to  every  required  point,  all  the  public  revenues;  and  at 
the  same  time  the  domestic  exchange  arising  from  commercial 
operations  could  be  facilitated  and  economized  to  the  utmost 
practicable  degree.  A  public  institution  designed  to  regulate 
and  assist  the  domestic  exchanges  of  the  country,  with  all  the 
ramifications  and  branches  to  make  it  efficient,  would  be  a  boon 
to  the  industry,  the  trade,  and  the  credit  system  of  the  country, 
the  value  of  which  would  be  almost  beyond  estimate.  It  would 
need  to  have  a  close  and  S}^stematic  connection  with  the  finan 
cial  system  of  the  United  States,  that  the  offices  of  the  public 
treasury,  and  the  offices  of  domestic  exchange,  might  operate 
together,  so  far  as  needful,  and  lend  mutual  support  in  every 
exigency,  and  that  their  information  might  be  in  common. 

This  can  be  done  with  great  effect,  without  departing  from 
the  true  limits  of  a  proper  system  of  national  finance,  and,  on 
the  other  hand,  without  disturbing  the  regular  processes  of  the 
credit  system.  This  mode  of  facilitating  the  domestic  exchanges, 
and  of  assisting  the  national  treasury,  might  be  ultimately 
enlarged,  so  as  to  curb  or  cure  many  evils  of  the  credit  system. 
It  might,  indeed,  be  so  shaped  and  ,so  managed,  whilst  pro 
moting  every  legitimate  interest  of  industry  and  trade,  as  to 
bring  fairly  and  permanently  within  the  power  of  the  general 
government  that  control  of  the  currency  of  the  country  which 
the  present  banking  system  has  given  to  the  separate  States  ; 
a  result  attainable  without  any  shock  to  credit,  or  any  violence 
to  the  banks.  The  measures  and  financial  policy  directed  to 


INSTITUTION    OF    DOMESTIC    EXCHANGE.      641 

this  important  object  might,  we  fully  believe,  be  so  shaped  and 
so  managed,  as  to  secure  the  approval  of  all  the  best  banks  in 
the  country,  and  still  more  certainly  that  of  their  customers. 

An  institution  designed  to  regulate  and  aid  the  domestic  ex 
changes  of  the  United  States,  and  to  accomplish  the  transmis 
sion  and  distribution  of  the  public  revenues  free  of  expense, 
would  have  to  receive  its  shape  and  power  from  the  general 
government. 

For  its  general  features,  we  make  the  following  suggestions : 

A  capital  of  not  less  than  $5,000,000  in  coins  or  bullion, 
derived  from  residents  of  the  United  States.  The  subscription 
to  remain  permanently  open  to  all  persons  applying  by  letter, 
by  proxy,  or  in  person,  who  pay  the  amount  at  the  time  of  sub 
scribing.  No  sum  less  than  $100  received.  Receipts  to  be 
given  in  sums  of  $100.  negotiable  and  payable  to  bearer,  or  to 
order,  as  desired. 

The  depositories  of  the  United  States  to  be  authorized  to 
receive  and  keep  this  paid-up  capital,  but  wholly  apart  from 
public  money,  until  safe  places  of  deposit  can  be  provided. 

To  have  as  many  offices  as  may  be  needful,  one  at  least  in 
every  State,  and  one  in  every  town  of  10,000  inhabitants ;  no 
one  of  which  to  have  power  to  lend  money,  to  issue  bank-notes, 
or  keep  deposit  accounts,  to  discount  or  purchase  commercial 
paper  of  any  description,  or  any  other  security. 

The  capital  to  be  strictly  applicable  to  the  payment  of  the 
balances  of  domestic  exchange,  and  to  afford  the  requisite  facili 
ties  for  the  transmission  and  distribution  of  the  public  revenue. 

To  have  power  to  receive,  pay  and  purchase  coins  and  bullion  ; 
to  purchase  at  par  treasury  notes,  or  other  securities  of  the 
general  government ;  and  to  purchase  its  own  scrip  or  shares  at 
not  less  than  par,  payable  in  coins  or  treasury  notes. 

The  office  in  New  York  to  have  the  special  direction  as  to 
payments  of  balances  between  the  offices,  and  as  to  the  transmis 
sion  and  distribution  of  the  public  revenue,  in  accordance  with 
the  requirements  of  the  proper  officers  of  the  treasury.  The 
affiliation  of  all  the  offices  to  be  so  complete  as  to  make  one  body 
of  the  whole,  all  property  and  all  liabilities  being  in  common. 
41 


642       INSTITUTION    OF    DOMESTIC    EXCHANGE. 

Each  office  to  receive  for  collection,  from  banks  or  bankers, 
corporations  or  individuals,  every  description  of  paper  security, 
payable  at  a  different  place  from  that  at  which  it  is  received ; 
and  to  make  proper  arrangements  for  all  who  desire  to  adjust 
and  set-off  debts  without  the  use  of  money. 

All  collections  to  be  made  through  the  officers  or  agents  of 
the  institution,  and  in  par  currency  of  the  place  where  the 
amounts  collected  are  received. 

The  offices  to  make  daily  settlements  with  each  other ;  where 
this  is  not  practicable,  to  make  them  as  often  as  the  mails  and 
the  course  of  business  will  permit.  The  accounts  of  the  offices, 
as  against  each  other,  to  be  first  balanced,  and  the  difference 
adjusted  or  paid.  The  proceeds  of  collections  to  be  then  distri 
buted  among  those  who  had  deposited  claims  for  collection 
which  had  been  duly  paid  at  other  offices.  The  charge  for  col 
lection  not  to  exceed  half  per  cent.,  to  which,  at  each  settlement, 
is  to  be  addeel  at  the  creditor  offices,  and  apportioned  upon  the 
whole,  the  cost  of  remitting  specie  to  pay  the  balances. 

To  transmit,  free  of  expense,  any  funds  of  the  United  States, 
at  the  instance  of  the  proper  officers  of  the  treasury,  to  any 
office  of  the  treasury  designated ;  and  to  perform  any  other  ser 
vices  for  the  treasury  which  may  be  within  the  scope  of  its  action 
and  organisation ;  that  is,  any  service  pertaining  .to  the  payment 
or  receipt  of  coins  or  bullion,  or  pertaining  to  treasury  notes,  or 
any  other  security  of  the  United  States. 

To  have  power  to  correspond  with  institutions  or  individuals 
in  foreign  countries,  in  reference  to  the  payment  of  balances, 
setting-off  debts,  and  to  the  export  or  import  of  the  precious 
metals ;  but  not  to  have  power  to  purchase  or  discount  foreign 
bills  of  exchange,  nor  to  draw  bills,  nor  sell  drafts  upon  any 
foreign  correspondent  or  country. 

The  capital  being  paid,  the  organization  being  completed,  the 
Secretary  of  the  Treasury,  the  Treasurer  of  the  United  States, 
and  all  the  Assistant  Treasurers,  the  Directors  of  the  various 
mints  and  assay  offices,  to  be  ex  officio  members  of  the  Board  of 
Directors. 

Dividends  to  be  declared  half-yearly,  payable  in  coins  or  trea- 


ADVANTAGES    OF    SUCH    AN    INSTITUTION.     643 

surj  notes,  as  the  parties  entitled  may  request.  No  reserve  of 
net  profits  to  be  retained,  except  what  may  be  necessary  to 
replace  capital  expended  in  building,  or  in  the  purchase  of  build 
ings,  for  the  purposes  of  the  institution. 

Interest,  at  the  rate  of  six  per  cent.,  to  be  paid  to  every  new 
subscriber,  from  the  time  of  his  deposit  until  the  end  of  the  cur 
rent  half  year. 

An  institution  of  this  kind  would  rapidly  commend  itself  to 
the  whole  country,  by  its  usefulness  and  economy.  It  would  be 
perfectly  safe,  because,  with  a  large  capital  of  the  precious 
metals  always  in  its  vaults,  it  would  incur  no  debt  nor  obliga 
tions  which  could  sweep  away,  or  even  endanger  its  treasure. 
It  would  be  a  mere  collector  of  the  debts  of  others,  never  a  pur 
chaser  of  any.  It  would  collect  debts  in  current  par  funds,  and 
pay  in  the  same.  Only  balances  between  the  offices  would  be 
payable  in  coin,  which  would  be  changing  coin  from  one  office 
to  another.  It  could,  therefore,  never  fail  but  from  the  disho 
nesty  of  its  officers ;  and  the  capital  would  be  so  subdivided, 
and  the  accountability  so  strict,  and  subject  to  the  scrutiny  of 
so  many  eyes,  that  no  serious  inroad  upon  it  could  occur  from 
frauds  or  unfaithfulness. 

It  would  be  purely  the  servant  of  the  public,  and  could  only 
operate  in  proportion  as  the  public  patronized  it.  With  it  there 
could  be  no  expansion  nor  contraction  injurious  to  the  public. 
No  injurious  competition  between  the  offices  could  arise,  for  it 
would  be  one  body  through  the  whole  country.  It  would  be  an 
instrument  upon  which  the  whole  public  could  play,  but  which 
could  not,  like  the  banks,  play  upon  the  public. 

It  would  be  no  monopoly,  for  the  subscription  book  would  be 
permanently  open  to  all ;  and  it  would  not  grow  too  large,  for, 
having  the  power  to  purchase  its  own  stock  at  par,  that  process 
would  always  check  its  growth.  It  would  grow  at  the  conve 
nience  of  the  people,  and  diminish  at  their  convenience. 

It  would  have  no  feature  of  a  bank,  for  it  would  circulate  no 
notes,  accept  no  deposits,  and  discount  no  paper.  Neither  would 
the  specie  in  its  vaults  be  idle,  for  the  certificates  of  stock  would 
circulate  in  large  transactions.  It  would  not  only  be  open 


644  CONCLUSION. 

all  the  time  for  new  subscriptions  of  stock,  but  the  whole  stock 
would  be  in  motion  as  a  medium  of  payment.  It  would  be  truly 
national,  because  an  interest  in  it  would  be  always  open  to  every 
person  who  could  pay  $100. 

It  would  sustain  and  strengthen  the  Independent  Treasury, 
by  bringing  it  into  full  contact  with  the  internal  exchanges  and 
the  capitalists  of  the  country ;  and  would  remove,  or  greatly 
mitigate,  every  evil  of  that  system  unfavorable  to  the  interests 
of  trade  and  industry.  It  would  always  contain  a  large  reserve  of 
specie,  of  which  a  considerable  portion  could  be  spared  upon  any 
emergency.  The  holders  of  the  stock  could  always  find  a  pur 
chaser  at  par  in  the  institution  itself,  when  occasion  demanded. 

The  economy  of  thus  clearing  debts  between  cities,  states  and 
districts,  cannot  be  computed  at  less  than  $5,000,000  annually ; 
but,  taking  into  account  the  friction  and  trouble  to  individuals 
and  banks  which  would  be  prevented,  -the  economy  might  be 
safely  estimated  at  more  than  double  the  sum  named. 

Whatever  advantage  and  saving  of  friction  resulted  from  such 
a  system  would  be  clear  gain,  for  there  would  be  no  power  nor 
inducement  to  injure  any  of  the  great  interests  of  the  country, 
monetary,  commercial,  or  industrial. 


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